Always pick brokers with robust financials and very little or no debt, this would ensure the broker you are with is in it for the long haul as they would have considerable assets and a potent revenue stream.
By Nikhil Kamath, Co-Founder, Zerodha
Stockbroking is an extremely regulated sector and in most cases, there are numerous checks in place both from the exchange as well as the regulators. This being said there were instances of brokers misappropriating funds, but most brokers to a large extent have clear demarcations between funds owned by the broker and client funds held.
Here are some of the measures a retail client can take to ensure that his broker is following the required norms and regulations.
a) Quarterly Settlement:
Ensure that your broker is following the quarterly settlement rule wherein all the unused funds in your account need to be transferred back to your bank account at the end of every quarter.
An added step of caution here would be to withdraw funds from your trading account once every month, which you could choose to transfer back the very next day; hence, not losing out on any trading opportunities.
b) Daily reporting:
The broker is mandated to issue a mg 13 file to the exchange at the end of every trading day, if the client in question has lesser margin than prescribed by the exchange there would be a penalty levied.
One could check with his broker if this process is being followed systematically and no wrong reporting is taking place.
c) Clearing House:
Choosing a broker who does not self-clear buy uses a large intermediary to clear trades, this adds another layer of security as the client funds submitted to a broker lies with external clearinghouses, who in turn have an added layer of regulation and provide additional security.A clearinghouse like ILFS, for instance, is rated highly and has an extremely competent risk management mechanism.
d) Broker Financials:
Always pick brokers with robust financials and very little or no debt, this would ensure the broker you are with is in it for the long haul as they would have considerable assets and a potent revenue stream.
Websites like http://comparebrokerages.in/ provide users with a common platform wherein the financial health of a collection of brokers can be ascertained.
e) Track record:
Brokers with a track record of many years of ethical behavior and hindering to a strict code of conduct should be given preference.
In summary please note that the brokers providing excessive leverage should draw circumspection as these would be the most likely candidates to be leveraged to the tee.
In terms of brokerage, with the slew of options available, these days and the options to compare them accessible online, paying excessive brokerage is a cardinal misstep.
Pick the best broker for your needs bearing in mind the points mentioned above and there will be umpteen numbers of options that become available at a cost never before seen by the industry.
Disclaimer: The author is Co-founder & Head of Trading, Zerodha. The views and investment tips expressed by brokerage firms on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.