- Date : 13/11/2020
- Read: 5 mins
Planning to trade in stocks? Here is everything that you wanted to know about stock brokers.
What are stockbrokers?
Stockbrokers are entities through which an investor or a trader can buy or sell stocks. The term stock broker can be used for an individual as well as an organisation. Stockbrokers in India have to be registered with SEBI (Securities and Exchange Board of India), the regulator for the Indian securities market. Most leading stock brokers in India offer both offline and line trading services across equities, commodities and derivatives.
Related: Important things to know before investing in the stock market
What do they do?
They provide important services for the clients. They keep the customers updated about market fluctuations and offer buy or sell recommendations.
The stock broker performs these functions by providing a trading platform as well as a Demat account to each client. These facilities can be used for trading in different stock exchange products such as equities, derivatives, commodities, currencies, mutual funds, etc. The Demat account is exactly like a depository account. In this, all the shares bought through exchanges by the client are kept in Demat form. Clients can use the leverage provided by the stock broker against their existing holdings or cash in their ledger balance to make more trades.
What is the methodology they use to buy and sell stocks?
During a bull run, when the markets are doing well, the stock brokers perform a lot of transactions. This is because more and more people start investing based on their advice, or making sales of securities for booking their profits. During a bear run, that is when the stock markets are low and not performing too well; most people prefer to sit tight. This advice is also given by the stock broker. Therefore you need an honest person who will give well-intended advice. Since the stock markets are highly volatile, the stock broker's job involves keeping close tabs on the movements and fluctuations in the market and providing current advice at all times.
A stock broker covets a large number of clients and large trading volumes as these directly impact their bottom lines. However, well-established stock broking companies realise that the only way to cultivate these conditions is to give well researched and truthful advice, even if it impacts them in the short run.
Those who wish to trade in the stock markets must open a Demat account with a stock broker. While opening an account, apart from fulfilling KYC and other formalities, the individual would also offer Power of Attorney (POA) to the broker by signing a document. This would enable the broker to transfer securities, carry out the settlement of trades and funds from the client’s bank account as well as recover the amount which is due to the broker. Therefore it is vital to choose a credible stock broker.
Every time a trader buys or sells shares, she would be charged[S1] the following:
- Brokerage charges
- Securities Transaction Tax (STT)
- GST (Goods and Services Tax)
- Stamp Duty
- SEBI Turn over Tax
- Capital Gains and Long Term Capital Gains Tax
Depending on the size of the stock holding, the trader would even incur AMC charges.
Buying stocks
Before executing a trade, the trader would have to transfer funds from her bank account to her Demat account. The value of the fund should be enough to cover the brokerage charges as well as taxes. After transferring the funds to the Demat account, the buyer can purchase stocks using the available amount.
Selling Stocks
When a trader sells the shares that she holds, she would receive an amount which is equivalent to the product of the number of shares sold and the value of each share minus the taxes and brokerage. This amount is deposited in her Demat account. She can either use it to buy shares or can transfer it to her bank account.
Stock exchanges in India follow a T+2 settlement. This means a trade carried out on Monday would be settled on Wednesday assuming stock exchanges are open on all three days.
Related: 5 benefits of Demat account every Indian investor must know about
Who regulates them?
The stock broker also has detailed knowledge of all the rules and regulations prescribed by the Securities and Exchange Board of India (SEBI) and helps to keep the client's investments and transactions in compliance with all the applicable regulations.
All stock brokers may not be trained equity or stock market analysts. The larger stock broking firms have specialised analysts whose job is to research the stock market and understand the movements. These movements could be industry-based, credit risk-based or company-specific. All the stock brokers are immersed and highly clued into the investing business. They learn the rules of what moves the stocks, have their ear to the ground and know of the latest market developments as they happen or even pre-emptively. Using analysis and knowledge, stock brokers can identify some probable winners and losers, which are accordingly suggested to the clients. However, there can be no guarantee of the same.
Everyone wants to know "who is the best stock broker that they can go to for their investment needs?" Since stock brokering is a multi-layered job, the best stock brokers may be evaluated with respect to many points:
- Who does the best research?
- Who has the best advisory service?
- Who charges the lowest brokerage and margin fees?
- Who has superfast trading platforms with the maximum experience?
- Who are the ones providing the best service?
If there is a particular service you need, you should look at that particular facility and who is the best at providing it. For example: if you perform a lot of intra exchange transactions – you need a superfast trading platform and should choose a broker accordingly.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
