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What Is a Broker?

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Brokers—also known as trading members—perform a vital function in the stock market. They execute transactions such as the buying and selling of stocks on behalf of their clients. In return for this, they charge a brokerage commission.

But stock market brokers provide other services too. These include portfolio management and financial advice, for example. With stock market transactions taking place online, brokers also offer multiple platforms through which investors and traders can access the stock market.

HOW BROKERAGE HOUSES SUPPORT TRADERS

Back when stock exchanges were a physical venue, brokerage firms represented their clients on the exchange floor. As the legal representatives of their customers, they carried out buy and sell orders as per the client’s instructions.

Brokers are registered members of the stock exchange. Moreover, they have to comply with the regulatory guidelines imposed by the market regulator, the Securities and Exchange Board of India (SEBI). Find out more about stockbrokers in India.

Today, India has a dematerialised stock market where trades are executed online. Stockbrokers still carry out the same primary function—executing orders on their clients’ behalf. But the venue has moved to digital channels.

FUNCTIONS OF A BROKERAGE FIRM

  • Order execution: Brokers execute their clients’ trading orders online. For this, the brokerage charges a commission. This may be either a flat fee per transaction or a percentage of the transaction value.
  • Trading platforms: Having multiple secure platforms through which clients can place orders is essential nowadays. Most of the bigger brokers provide trading apps and software for smartphones, laptops, and tablets. You could also trade and invest via phone or chat.
  • Financial advisory: Both new and seasoned investors depend on stock recommendations from their broker. But stockbrokers are required to disclose all information when recommending a stock—that includes being transparent about the risks.
  • Margin financing: Traders who have accounts with large brokerage funds can use margin funding facilities. This essentially means borrowing funds from the broker to take bigger positions in the market.

To perform these stockbroking functions, the firm must get the necessary licenses. For this purpose, they must register with SEBI and become a member of a stock exchange. Know the advantages of using brokerage firms.

TYPES OF BROKERS

A stock investor or trader can look into three main types of brokers: full-service brokers, discount brokers, and robo-advisers.

1. Full-service broker

A full-service broker provides a large variety of services to its clients. Most full-service brokers have offices in major cities where customer service staff can meet clients in person. These brokers offer customised support through tailored brokerage plans and services for investors with different interests and varying levels of expertise. Clients with large holdings could even engage dedicated service managers to handle their portfolios.

Full-service brokers also provide educational materials and financial advisory. For instance, they may offer stock recommendations tailored to your brokerage plan. But they are also required to disclose if there are any risks associated with their stock tips. It helps that these brokers usually have in-house market research teams to compile regular market research reports. Customers can access these reports and gain research-based insights. They can also view market data and news live, and opt to receive real-time market alerts via SMS.

The average commission charged by full-service brokers is 0.3% to 0.5% per trade. This is on the higher side. But the extra cost can be worthwhile given the wide range of services and products on offer. Find out how to get the lowest brokerage charges in India.

2. Discount brokers

While full-service brokers provide a whole catalogue of services, discount brokers focus on the basics. Discount brokers carry out buy and sell orders for their clients but do not offer any additional services. For this reason, they also charge a much lower commission. In some cases, the charge may be as low as Rs 10 per transaction.

How are discount brokers able to keep their charges ‘discounted’? Since they provide only transactional services, they may not have too many physical set-ups. This keeps their operational costs low. Such brokers operate mainly through online platforms.

They can be suitable for seasoned investors who are looking to save on costs. But the absence of advisory, research, and customised services can be a disadvantage. Such brokers may not be the right choice for those who are new to stock market investments.

3. Robo-advisers

Robo-advisers are automated digital platforms that provide financial planning services online. They use algorithms to come up with the financial advice and require with very little human supervision. How do they work? The client completes an online survey to provide information about their financial situation and goals. The robo-adviser uses this data to offer investment advice.

Robo-advisers tend to be cheaper than even discount brokers. Many charge an annual flat fee of 0.2% to 0.5% of a client’s total account balance. The opening balances are very low as well. Besides, you can reach the robo-adviser at any time through an internet-connected device. There’s no need to go to their office. You can start transacting in just a few clicks.

However, your investment options may be limited. That’s because robo-advisers deal mainly in mutual funds.

WHAT TO EXPECT FROM A BROKERAGE FIRM

Depending on the type of brokerage firm you choose, expectations will vary. So, let’s focus on the points of difference:

  • Tailored service:

    - Full-service brokers are the most customer-oriented. They provide research-based market insights and alerts, financial advisory, and portfolio management services.

    - Discount brokers focus more on the transactional experience.

    - Robo-advisers provide investment advice using an automated algorithm.

  • Presence:

    - Full-service brokers have an online presence, along with several physical offices that make face-to-face interactions possible.

    - Discount brokers have only a few physical offices. They operate mainly through online platforms or the telephone.

    - Robo-advisers are an online-only option.

  • Asset classes:

    - Full-service brokers permit trades in multiple asset classes. These include mutual funds, stocks, bonds, IPOs, derivatives, and more.

    - Discount brokers allow only stock and mutual fund investment.

    - Robo-advisers mainly deal in mutual funds.

  • Explore the financial instruments traded in the stock market. Also, get to know the difference between stocks and shares.

  • Charges:

    - Full-service brokers usually charge brokerage fees of 0.3–0.5% per trade.

    - Some discount brokers charge as little as Rs 10 per trade, regardless of the transaction value.

    - Robo-advisers can be the most cost-effective option. The annual charges range from 0.2% to 0.5% of a client’s account balance.

HOW TO CHOOSE A STOCKBROKER

Your priority should be to choose a brokerage firm that best meets your personal and financial needs. Keep the following pointers in mind during your selection process.

1. Read customer reviews: Individual opinions can be biased, but user reviews may be worthwhile to read. Often a pattern emerges from them. Careful scrutiny of the comments can reveal information about the broker that is not otherwise available.

2.  Check past performance: It is true that past performance does not always predict the future. But if a firm has failed to perform well in the past, you should be wary. Search extensively on the various stockbrokers in India. Compare the performance of various broker agencies online, look for reviews and reports by financial papers, and see if you can find any rankings.

3. Gather feedback: Talk to family and friends who have invested through a particular broker and ask about their experience. However, keep in mind that everyone’s inputs will be coloured by their own perceptions and preferences.

4. Brokerage charges:Every stockbroker charges a certain brokerage fee. While discount brokers and robo-advisers charge a nominal fee, a full-service broker has higher charges but also offers a wider range of services. Compare the charges and facilities available before choosing a broker.

SUMMING UP

If you wish to invest and trade in the stock market, you will need to open demat and trading accounts. Explore the different account options available—whether standalone demat and trading accounts or a 2-in-1 account which combines both account types.
Whether you need a full-service broker or a discount broker will depend on your requirements, of course. If you understand how the markets work, you could save on costs by opting for a discount broker. On the other hand, say, you are a beginner in the stock market and need guidance at every step. Or, maybe, you lack the time or inclination to carry out market research and identify suitable trading opportunities. In both cases, a full-service broker that offers educational resources and in-depth research insights would be better suited to your needs.