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How to select an online broker
Anand Rawani, Outlook Money | June 11, 2007
To say that online investing has grown extraordinarily fast over the past couple of years is akin to describing Marilyn Monroe as reasonably attractive. While it may be easy to trade on the Net, finding the right online broker takes some doing.
Given that online trading is still at a nascent stage, online brokers are willing to offer many options -- brokerages that decline as volumes soar, waiver of account opening charges, access to research reports, and the facility of transacting in financial instruments through the trading website. So whom should you choose? The answer depends on a host of variables -- both qualitative and quantitative.
Qualitative factors are usually a little hard to assess and largely pertain to expectations of service standards. It helps to talk to acquaintances who trade online about the website's reliability, ease of fund transfer and transaction, and the customer service quality of the e-broker, the only human interface in the entire mechanism. Nonetheless, there are some key factors that help you compare e-brokers.
Brokerage. It's a recurring cost and can potentially draw down returns. Every player claims that his brokerage is the lowest or at least promises to charge the minimum once an investor opens an account and starts trading. But this promise is contingent on the trading volumes of the investor.
The brokerage differs from company to company. To give an indicative figure, ICICIDirect.com charges 0.75 per cent for a quarterly volume of less than Rs 10 lakh (Rs 1 million) and 0.25 per cent for an amount in excess of Rs 5 crore (Rs 50 million).
The brokerage for the quarter that follows the opening of an online trading account is determined by the opening amount of investment, irrespective of the subsequent investments in that quarter.
Any amount due to either the broker or investor over and above the brokerage paid is settled every quarter and the opening amount of the next quarter determines the brokerage that will be paid in that quarter.
While 5paisa.com has the lowest brokerage -- 0.25 per cent -- on delivery, Angel Broking offers the lowest -- 0.02 per cent -- on intra-day trading (see A Comparative Look at Online Brokers).
Position traders -- investors who buy and hold securities for the long haul -- typically opt for low brokerages. Daily traders, who trade in large volumes, usually settle for what brokers call zero per cent brokerage.
This does not mean that they are not charged brokerage, but alludes to a fixed brokerage fee irrespective of turnover or up to a certain turnover for a period of time: higher the investment, lower the brokerage.
For instance, Reliance [Get Quote] Money charges Rs 500 for delivery-based volumes up to Rs 10 lakh (Rs 1 million) for two months. If one trades with 5paisa.com for the same volume, the brokerage amount will be Rs 2,500 (at the rate of 0.25 per cent brokerage). So, at this volume, Reliance Money scores over 5paisa.com. However, the fixed brokerage of Reliance Money is higher than 5paisa.com's brokerage for investments less than Rs 2 lakh.
Account opening and maintenance costs. In order to trade, an investor needs to open two accounts with the brokerage firm - a demat account to keep the shares and a trading account to trade.
If cost is an issue, you may select Almondz, for instance, since it charges only Rs 400 for opening an account (see A Comparative Look at Online Brokers), but do not hold a demat account with one company and a trading account with another since it delays the settlement of shares and cash.
Another fixed cost is the annual maintenance charge. While some companies such as Kotak Securities have a high maintenance charge, Almondz, Religare, Reliance Money, 5paisa.com and IndiaBulls [Get Quote] charge nothing at all.
Minimum trade requirements. Some online brokers insist on a minimum transaction volume for which they charge their lowest brokerage. For instance, ICICIDirect.com has set its minimum transaction at Rs 500 and charges a brokerage of Rs 25 on it. Geojit Financial Services [Get Quote] has not fixed a minimum transaction amount, but the minimum brokerage is Rs 20.
Margin trading. This is available in the online domain and involves paying only a proportion of the trade value upfront. Such trades could attract higher brokerage than the regular transactions.
Mostly traders, who go for intraday transactions, go for this form of trading. Investors typically invest for longer periods and margin trading is not suitable for them as brokers charge huge interest on the value of the trade that is not paid upfront.
Access to research. Online brokers provide regular updates on market favourites - stocks to buy, hold or sell - through the Net as well as SMS. Apart from this, a relationship manager is appointed who works as an intermediary between the investor and the broker, and plays the helpful tipper.
Investors need to remember amidst the daily onslaught of tips that too much trading does not necessarily translate into big bucks.
Tie-ups with banks. To trade with a broking company, you need to have an account with one of its collaborating banks. Typically, broking firms have fewer collaborations with public sector banks. Almondz scores above others here since it has tie-ups with numerous private sector banks and 19 public sector ones.
Apart from the charges mentioned above, an investor is required to pay the security transaction tax and service tax (including education cess of 3 per cent), which amount, respectively, to 0.125 per cent of the transaction value and 12.36 per cent of the brokerage amount. These also raise the cost of the trade.