Want a broker? Read this!

o you are all set to buy your first set of shares.

Here's the thing: you can't do so directly. People like you and me cannot go to a stock exchange and buy and sell shares.

If we want to do so, we have to get in touch with a member of the stock exchange. Which means you need a stockbroker.

Why you need a stockbroker

Stockbrokers buy and sell shares for themselves to make a profit. They also buy and sell shares on behalf of other people and take a commission for doing so.

So how do you get yourself one?

This is where we come in. Before we proceed, a strong word of advice:

Take your time selecting a broker. Choosing a broker is, in many ways, similar to choosing a bank.

The first, most important quality is a broker must have a good reputation.

You will be trusting him with large sums of money and with your stocks, so you need a person you can trust completely.

1. Broker or sub-broker?

There are many horror stories of sub-brokers (these are people licensed by brokers to work under them), cheating their customers. Even if the intention is not to cheat, there are instances of delayed payments, trades not being put through on time, phone calls not being taken, wrong advice given and excess charges.

It's best, therefore, to choose a broker directly registered with the Securities & Exchange Board of India.

Every stockbroker has to be registered with SEBI, the stock market regulator. SEBI's main function is to make sure those who invest in the stock market follow the rules and no scams take place.

It is supposed to act as a watchdog on behalf of the investors.

2. Snoop around

You could choose a broker in two ways -- depend on friends, relatives or trustworthy acquaintances who have had good working relationships with brokers, or you could decide to stick to reputed brokers.

The Bombay Stock Exchange directory or the National Stock Exchange web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.

The trade-off between a large institutional broker and your well-known neighbourhood broker is that while the former has the reputation, the latter can provide you with personalised service. Big is not necessarily better.

If you do rely on friends for references, make sure you ask them searching questions. Typical ones will be:

i. How often do they use the broker's services?
ii. Is he easily available?
iii. Have they had any delays when placing a buy or sell order?
iv. Does the broker provide sound advice?
v. Is the broker helpful?

3. How convenient is it for you?

Will your broker be available all the time for your transactions? Some brokers even offer services after market hours.

i. Check out how many phone lines a broker has. It will tell you about his ability take your calls.

ii. Find out whether his office is nearby, whether you can drop in at his office for a chat or to pick up your contract notes. These are the documents that record every sale and purchase of stocks. They are proof of the transaction.

It is absolutely essential that you collect a contract note for every transaction you make.

iii. If the office is not near, does the broker deliver the contract note to your home or office?

Stock exchange rules mandate that all brokers have to dispatch by post or hand deliver the contract notes within 24 hours of the trade.

iv. How will he collect your cheques? Does the broker have ample staff to enable him to service his clients?

4. Does he extend a helping hand?

Find out whether your brokerage will be able to offer you other important resources, like research reports and analysis.

Some of them provide regular newsletters. They update clients on new issues in the market. Some even advise their clients on which stocks make good investments, taking the client's current stock market investments into account.

Check out whether finance can be arranged for new issues. If you want to invest in mutual funds, you might want a broker who will help you do that as well.

5. What about the costs?

Everything costs money.

i. Brokerage is the fee the broker will charge for doing the buying and selling of the shares on your behalf. They are usually in the range of 0.5% for all trades that result in delivery and are much lower (around 0.1%) for intra-settlement trades.

Usually, when you buy shares they are delivered to your demat account. Or you sell them and get paid for it. This is known as trades for delivery.

But if you buy shares and sell them the same day, it will square off your position and attract lower charges. These are intra-settlement trades, which have to be settled within three days (including the day you bought or sold the share).

ii. Charges also come down for higher volumes. For delivery volumes above Rs 1 crore (Rs 10 million), charges could be as low as 0.25%.

iii. A service tax of 10.2% is payable on the brokerage amount.

iv. A securities transaction tax of 0.075% of turnover is charged in addition to brokerage on all delivery trades. This tax is 0.015% of turnover on the sale of all non-delivery trades. If the stock exchange sets a no-delivery period for a stock during this period, trading is permitted in that security. But these trades (known as non-delivery trades) are settled only after the no-delivery period is over.

Be careful. Some brokerages charge extra for opening an account; others club the fees for demat transactions with the brokerage. Then there are maintenance fees for the demat account.

It makes sense to club the brokerage and demat fees that you pay and then make a comparison.

If you do not have a demat account, you can approach a broker who is also a depository participant. Some waive the demat fees. Many brokers are open to negotiation, depending on the volume of business you give them. Basically, you must sit down with your brokers and find out details about his service charges.