Selecting a stock broker

This is part II of the article: How to select a stock broker . Please read the first part of this article before continuing with this part

• Minimum Brokerage per share:

This is again another important point to notice. A broker like IL&FS charges minimum 10 paisa per share. A friend of mine, who used to trade in penny stocks, was unaware of this. He bought a penny stock costing 10 paisa and the buy stocks order was executed with 100,000 shares costing him 10,000 Rs. When he received the account statement, he observed that he has been charged 10 paisa per share as buy price + brokerage of 10 paisa per share + Service tax + Securities transaction tax. Ultimately, his buy price came to somewhere around 23 paisa per share, more than double of what the actual buy price was - also due to rounding of numbers. So for his stock purchase to be in profit, he required the stock to atleast cross 23 paisa, i.e. more than double the stock price.
That was not all. The same brokerage applied to sell orders as well. Hence, the required sell price was expected to come to more than 45 paisa, for him to just get back his invested money. It means the market price of his penny stock should increase by 4.5 times or 350% rise. Do we expect this to happen? He learnt it the hard way.
So always ask the broker how much is the minimum brokerage you charge. Like ICICI may have a 1 paisa per share brokerage, but it charges minimum 25 Rs. as brokerage on each order.

• Minimum Deposit required at the broker:
Another very important point. The money with the broker does not earn any interest. So the more deposit you give him, the more interest you may loose.

• Demat Charges
How much demat charges you have to pay? Does it depend upon the number of shares you hold? No. of different stocks you hold? Are there any minimum quarterly charges that you need to pay. While making profit loss calculations, we all tend to ignore these charges, but they eat up majority of our profits.

• Call n trade charges:
Along with the online access, some brokers allow you to call them on the phone and place trading orders. In case you don’t have internet access, then you may like to place orders on the phone. However, they may charge you for that. Ask them how much is the charge per call? Are there any minimum no. of calls free? Is there any varying rate of charges?

• Does the broker offer you a toll free number to place order
You may end up holding for long time and increasing your phone bill, just to place your order. This does not show up in your profit/loss calculations, but is an ultimate loss to you.

• Response time of website, on hold time on the phone
This should be another crucial factor to notice. If the markets start going down, within a few minutes your portfolio may be in big loss. The website of the broker should have good response time to hold such traffic. The telephone support should have large number of order takers to accept your order. Otherwise, if you want to sell in a falling market to cut your losses and you are put on hold for long time or the website goes down, then you end up on the loosing side.
The best way to know is to ask, ask and ask – your colleagues, friends, other traders – collect sufficient feedback before finalizing a broker.

Just to quote an example as indicated by Siddhartha in the comments of my previous post, ICICI charges 75 bps, Indiabulls charges only 25 bps – How can there be so much difference in charges?

The reason is quality of service and facilities. For example, you have a toll free number for Indiabulls, but yet there charges are less. The reason may be long on hold times or charges they may take. Website of ICICIdirect and its speed and uptime may be much better than that of India bulls. The biggest advantage of ICICI is that it has both depot and Nostro facility, so you don’t loose any interest on the amount that you keep with them. For Indiabulls, you don’t get any interest on the money you deposit with them. Also, you can easily transfer money from your bank account to your brokerage account. You can do the same in Indiabulls too, but you will then be directed to your banks website, hence there is a risk.
For example, when I book railway tickets online through irctc website, I pay through my internet banking account. After selecting the journey details, I am redirected to my bank’s website. Once I confirm my payment, I am again brought back to irctc website. Several times it has happened that I made the payment from my bank, but it did not reach irctc. The result, tickets were not booked, yet money was debited from my bank account. Then I have to follow up with customer service of irctc to get my money back and again book the tickets afresh. Entire refund process takes 4-5 days. Same may be a case with brokers which do not have depot and nostro facility together.
There can be several other factors that I may be not be aware of completely.

A good initiative would be to start by writing your experiences with your respective brokers in the comments section of this article. This way, it will be easy for you to get a collective feedback about all the various stock brokers – ICICIdirect, Indiabulls, 5paisa, IL&FS, Religare, RelianceMoney, etc. etc.

Just quote some sentences about plus and minus of your broker, and soon we can have some good amount of feedback to decide what’s good and what’s bad. That will really help in the purpose of this site.

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