Chapter 4: When you open a trading account you will be given a choice of segments—cash (shares), derivatives (futures and options), commodity and currency. In this chapter, we look at the aspects one needs to consider while choosing a broker and the mandatory transaction charges.
Q: I am ready to invest in stocks. How do I go about it?
A. The first thing you need to do is open a trading account with a broker. You will also need a demat account, in which your shares will be stored electronically.
You can have a demat account with the broker with whom you have your trading account or you can have it with any other broker/bank or custodian offering demat services.
When you open a trading account you will be given a choice of segments—cash (shares), derivatives (futures and options), commodity and currency. Stick to the segment you understand well.
Some brokers charge money for opening an account, especially demat account. In some cases, the opening amount is adjusted against the first purchase or sale of shares. Inquire about all costs upfront before opening an account. Also, ask for the brokerage rates that the broker will be charging for every transaction. The rates for trades in which you take delivery of the shares are higher, compared to trades where shares are bought and sold within the same day.
Q: Can I open more than one demat account? Is it a good idea to have more than one demat account?
A: Yes, you can open more than one demat account. But do not open multiple demat accounts to escape taxes. All transactions will eventually be reported to the tax department.
It is preferable to open a demat account with a bank or a custodian if you are not a frequent trader. In case you will be trading frequently, the broker will ask you to sign a Power of Attorney form, which would allow him to deposit and withdraw shares in your account. Unless you trust your broker and have a good relationship with him, avoid giving this power of attorney.
Q: How do I select a broker?
A: There are two types of brokers – a full-service broker and a discount broker.
A full-service broker, besides executing your orders, will also provide you recommendations on which stocks to buy or sell. Also, full-service brokers can finance your trades through their own non-banking finance companies or partner NBFCs. So, the brokerage will be higher compared to that charged by a discount broker.
A discount broker’s main appeal is low brokerage; in fact, the rates are structured such that the more you trade, lower the brokerage. This works very well for those who trade frequently.
But a discount broker does not provide stock research to client. Also, you can’t call up a discount broker to place orders. The trades have to be done by the client himself using either the desktop or mobile application provided by the broker.
Q: What are the charges I should be aware of?
While transacting shares, there is only one variable – brokerage rates. The rest are all statutory charges imposed by the government, exchanges and market regulator.
Q: Which of them is better? Discount broker or a regular broker?It all depends on your requirements. If you are technology savvy and trade frequently, a discount broker works better. But if you need suggestions on which stocks to buy and sell, and you need somebody to place the orders, a regular broker works better.