Things to look out for when trying out a new stock broker
On Trading QNA, site owned by discount broker zerodha, somebody asked that in the light of Unicon Securities scam how safe is it to trade using Zerodha.
A valid question, considering the fact that in the quest of saving money on brokerages one shouldn’t lose his entire deposits.
Nitin, founder of the firm, answered his question well to quench his fears. The points that he put forth is valid for every broker out there. Here are some of those.
1. Businesses that shut down usually will be loss making businesses and not profitable ones. We are probably among the most profitable if you look at earnings from pure retail broking.
A no-brainer. It is vital that you check profitability of the companies before you plunge in. There are many sites like comparebrokerages.in that you can refer.
2. We have zero debt on our books, no money every borrowed. We don’t lend any money either, if anyone wants facility like margin funding, we pass the lead onto our partner IL&FS.
True for all businesses. A small brokerage that gives out huge margin funding is a red flag straight away. Probably, biggies like ICICI direct, sharekhan, etc can afford that, but new, especially; discount brokers can’t.
3. We are usually among the first companies to file our IT returns, usually companies in trouble will delay and sometimes not file at all.
Keep an eye on this. Again, sites like comparebrokerages.in can help.
4. We have almost zero complaints against us on the exchanges by our clients in the almost 4 years of being in the business.
You can file a complaint against broker with the stock exchange. For egs, for NSE Keep track of news to see, if any complaints have been lodged with any regulatory board or with the exchange.
5. We are quite conservative in terms of leverage/intraday margins, changing quite fast based on the market volatility. High leverage is usually the culprit for disasters, both for clients and brokerages.
Same as margin. A small brokerage that gives out huge leverage is bound be disastrous. Probably, biggies like ICICI direct, sharekhan, etc can afford that, but new, especially; discount brokers can’t.
6. Members of recognized exchanges and regulated by SEBI/FMC. Even if a brokerage decides to shut down the client funds should ideally be safe if not there is also an investor protection fund setup by exchanges (more than Rs 1000 crores at NSE) which can be used in such cases
I don’t know how smooth the recovery is for end clients and how much money they may get back.