- Nowadays, investment in the stock market is widely discussed, especially among millennials, but understanding all these money market concepts are essential before getting into it.
- Let’s understand all the important things before getting involved in the stock market.
- We will start by understanding important terms such as stock, stock market, stockbroker, Factors to consider while choosing a stockbroker, and much more.
“Risk hai toh Ishq hai,” the line which got us grooving through the year of 2020 from the famous 1992 Financial Scam Series based on Harshad Mehta. Our financial knowledge though restricted, was confident enough to take the risk and invest in this particular thing called “stock.” Stocks are controlled by the stock markets and a wise decision needs to be taken to minimise loss and maximise profit here. Since we do not have the expertise to directly trade in the market, we hire brokers who perform as intermediaries to perform this job charging commission. Now we know the basic terms involved in our journey towards investing in stocks, let us dive deep to understand this financial market and our decisions.
What is a Stock?
A stock is basically security which represents the ownership of a fraction of the company. The units of stocks are called shares. These shares are issued by companies to raise money from the market while people prefer it as an investment.
For e.g., if you purchase stocks of Google, you purchase a fractional portion of ownership in Google (you do not own the company since every company lies as a separate legal entity and also you buy a fractional piece of the corporation only).
The Stock Market is the place where the activities like buying, selling, and issuance of shares by public companies take place. There are multiple stock trading venues in a country or a region that allows such transactions and operations.
It brings all the stocks together in a market ensuring fair pricing practices and transparency in transactions. In India, we have the Bombay Stock Exchange and the National Stock Exchange while some leading stock exchange markets include the New York Stock Exchange and the Chicago Boards Options Exchange (CBOE).
A stockbroker is basically a professional trader who buys and sells the shares on behalf of the clients. They might also be known as an investment advisor as they recommend the best investment decisions for you.
They work individually as well as with a brokerage firm and charge their commission or the compensation as decided by the employer.
ResourceThere are various heads under which the stockbrokers work such as:
- Full service or Traditional brokers.
- Discount brokers.
Most of the people are now using the online discount brokerage system like Zerodha, Upstox, Samco, etc. where they do not offer individualised investing advice but a platform to execute trades for a small-set of commission to be paid on every order. The traditional brokers, on the other hand, provides you with all the services of investment, planning, wealth management, and other sorts of advice charging a total cut commission on the volume of the trade. These include ICICI Direct, Kotak Securities, Sharekhan, Axis Direct, etc.
Why a Stock Broker?
The most common question which one might ask is if I have the financial knowledge, then is there a need to pay a certain commission to a broker. So the people who trade are the members of the exchange or belong to a member firm. They are licensed as brokers or broker-dealers by the Financial Regulatory Authority (FINRA). Though it is possible for you to buy and sell stocks directly but it is always preferred and simpler to do it through a stockbroker.
There are various benefits to hiring a full-service stockbroker like:
- Investment management Expert Advice.
- Marketing Insights.
- Provide research.
- Make informed choices.
While for Discount Brokers:
- Easy accessibility.
- Quick mode to transact.
We know the definitions and the marker now but what to see in selecting the right stock broker for you what are the pain points or the brownie points to give to anyone while selecting the one.
Factors to Consider While Choosing a Stock Broker
You want your return on investment to be the best and thus, you need to consider hiring a proper stockbroker. Here are the following points you must keep in mind:
Check for the Broker’s background: It is essential to do a history check of the performance of the brokers like the number of years he has been in the industry, the reviews of the clients worked with, performance output, and others. For e.g., if one buys an apple from a shopkeeper he ensures that his investment is worthy enough to have the proper product.
Look for the minimum balance to be kept: The stockbrokers required you to maintain a minimum balance with them. Compare the various brokers in the market and choose the ones which suit your pockets.
Check if the broker is regulated: Frauds are bound to happen in this market where people are oblivious to the profits and losses, so they might fool you in the name of higher margins but it is your responsibility to check the authenticity of the broker so that your crucial money is in the right hands.
Checking the research capabilities: The past performance on the equity reports, publishing market trends, and their insights on the financial markets are the ones to look out for in terms of choosing the best out of the brokers. Various websites as well as the stockbroking agencies have their own blogs and recommendations where they help you in your investing journey.
Margin Leverage: Margin exposure is a huge factor in selecting the best brokerage firm for stock trading as it allows you to trade multiple times over available funds in your account. Some brokers like Kotak Securities offer 50 times leverage for intraday trading so one must check out this facility to be availed.
The commission charged: Different brokers have their different sets of commission, it is advisable to check the margin of profit of the brokers so as to ensure a fair deal for yourself.
Customer Service: The vital role of a stockbroker is to provide good services to the end-users. One must always ensure if they are capable enough to provide good customer services as to responsive, alert, and all-time ready to deal with your matters. One can check with the other clients for their experience.
Add-on financial services: Add-on services are always considered to be an additional benefit on the part of the broker. It is recommended to inquire about the add-on services provided by a broker. You must compare the add-on services provided by different brokers and check how it will help you in achieving your financial goals.
Trading Platform: The online trading software offered by the broker nowadays is in the limelight. Your trading experience solely depends on the features, speed, user-friendliness, and reliability of the software.
Ask the question if the software has advanced charting features or market scanners? Does the broker offer a good mobile trading app to help you analyze and trade on-the-move? Read the reviews of the trading app of the stockbroker before making a decision. Check for the brokerage fees advising features and various other options available at the same commission rates and compare all the platforms and then come to a conclusion.
It is fair to say now that an investor should keep in mind the above factors to ensure the return on his investment and give in the specified time to research for the best stock broker for himself/herself. But where can you go for the right financial advice? Well, that’s a question you must answer yourself.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article for information purposes only, and it expresses my own opinions. Therefore, the readers/investors are hereby advised to apply their discretion while selecting the stockbroker and making investing related decisions.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.