How to Select Your Stock Broker?

A Stock Broker can make or break your fortunes. I was quite surprised to check the portfolio of one of my friend. His portfolio delivered +ve returns even after market corrected more than 10%. It was the magic of his Stock Broker. In my opinion, the net returns are 20% after adjusting the market correction. For simplicity purpose, in this post i will refer individual/organizations/firms/Analysts as a Stock Broker only. There are certain professions which are mainly dependent on word of mouth publicity like Doctors, Lawyers, Financial Planners etc. Stock Broking is one such profession. In the internet age, marketing of a brand/services also plays an important role in the success of a Stock Broker. In past, i hired services of multiple stock brokers and couldn’t resist sharing my learning’s. The reputation of one of the very popular Stock Analysts is such that investors start buying a particular stock when he give SELL call and vice versa. My conclusion is that there are only handful good stock brokers in the market and they are beyond the reach of small investors. The majority is a crowd who don’t know ABCD and simply follow the known names in the industry.

Through this post, i am not trying to say that we should not opt for services of a stock broker. For a common man, it is very difficult to understand the nitty-gritty of a stock market. The capital of an investor is at a very high risk. The equity market is 100% speculative. The recent example is the surge in the shares of Reliance Industries Limited by 12% in just a week’s times. This stock was under-performing from last 5 years. Before this pull back, everyone actually written off this stock. After this sharp increase, the so-called analysts/market experts, immediately changed their opinion on this stock. In short, the majority is only sailing with a stream. Now you have 2 options either to DIY i.e. Do it Yourself or select a good stock broker. If the size of the portfolio is small then it is always advisable to manage your portfolio on your own. You should learn the tricks of the trade for some time before taking a plunge into the stock market. Stock Brokers are interested to manage portfolios of a bigger size. Still you may find the ones who are trying to establish in the market and can manage the small size portfolio.

How to Select Your Stock Broker?

Once you decided that you need professional help. It is important to follow these steps to make a right decision

(a) No of Clients/References: Though we may feel awkward or reluctant to ask this question, but it is critical. You are handing over your hard earned money to someone to manage therefore it is imp. You can take feedback from few of the existing clients. In my opinion, you should pay for the services only if you can beat the returns of the market index. If the nifty has delivered 30% returns in last 1 year and the broker delivered 25% then nothing great. Some people are impressed with the so caller stellar performance of 25%. They forget to compare it with the benchmark which is market index i.e. NIFTY.

(b) Average portfolio Size: A stock broker sitting in a plush office may not be a big broker. You can always ask the average portfolio size handled by the broker. It will also help you to decide based on your investment bucket. You can discount the fig quoted by a stock broker up to 25%-30% as it is always exaggerated. If the average portfolio size of a broker is 1 Cr and you are planning to invest 25 lac then the match is not perfect. Reason being, the stock broker will not be serious towards your portfolio. You should not open your cards till you clarify all the points.

(c) Investment Strategy: It is very important to ask the current investment strategy followed by the stock broker. One shoe does not fit all therefore at a macro level the investment strategy of a client and the stock broker should be in sync.

(d) No of Stock Tips: Ideally you should have 7-8 stocks in your portfolio for long term or 10-12 for trading. When i subscribed to services of one of the reputed stock broker, i was bombarded with almost 20 calls/stock tips per day. After few days, i received self-congratulatory messages that we identified multi-bagger and shared with our clients. Now it’s a no brainer that out of 20, i can also find 1 multi-bagger. It is advisable to check no of Stock Tips shared. Instead of quantity focus should be on a quality.

(e) Success Rate: You can also check the success rate of stock tips i.e. out of 100 stock tips, how many hit the target. The success rate of 75% is good enough and that means the stock broker is good & can deliver +ve returns. The tips should be on both BUY and SELL. It will also depend on whether you are a long term investor or a trader. I personally don’t believe in long term investment as it’s an opportunity loss. For example, if i bought a share of company A at Rs 100 and it reached a peak at Rs 180. Depending on my investment philosophy, i should have sold at average Rs 150. Assuming, today it is trading at Rs 120 after the market correction then the long term investor has an unrealized profit of Rs 20 per share. The trader already booked the profit of Rs 50 and can re-enter at Rs 120. No one can time the market i.e. buy at the bottom and sell at the peak. Both buying and selling should be staggered linked to the investment objective.

(f) Free Trial: Before any commitment, you can opt for a free trial of the services at least for a month. It will help you to understand the services offered by the stock broker. You may not able to avail all the services but at least will get a taste of it.

(g) Fees and Commission: I am firm believer that you should offer profit sharing model to the stock broker. It will bring more seriousness and dedication from brokers end. At the same remember the profit sharing will eat into your profits. Assuming a scenario that nifty delivered 30% returns and your stock broker delivered 40% returns. In this case, if your profit sharing is 15% then your net returns will be 25% which is less than index returns. I am not sure if any broker will agree or not but ideal profit sharing should be 50-50 on the returns over and above the index returns. In the same scenario, if stock broker delivered a return of 40% i.e. he has beaten NIFTY by 10% then you should share 5% of the returns with the stock broker.

Concluding Remarks: In this post, i tried to cover all the imp points from a layman perspective. Stock broking services have various permutations and combinations & i will suggest my readers to check all the critical points. Before availing the services, you should check all the relevant points. Before availing the services of a stock broker, you should equip yourself with the basic knowledge and understanding of the stock market. For 1st time investors, i always suggest investing in Blue chip companies or NIFTY stocks.  Based on request of my readers, I have shared my stock investments/holdings in the post, Stock Tips – My Stock Portfolio

Disclaimer: Currently i am not using the services of any stock broker for Stock Tips and Recommendations. My trading account is with HDFC Securities in an individual capacity. The Stock Research Reports of HDFC Securities are available in public domain. 

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