Part I: Want an online stock broker?
Part II: How expensive is an online broker?
In the first two parts to this article, we spoke about how you could find an online stock broker and how much it would cost you.
This article will explain the other factors you need to consider before you zero in on an online broker.
Offline orders
Even if you trade online, you may still want the option of placing buy and sell orders over the phone.
Maybe you are stuck in a place where there are power failures and you cannot get online. Or, you are on holiday and you cannot get to a computer. What if the site is down or you have lost your password?
Does the online broker offer such a facility? Does it come at a cost?
ICICI Direct, for instance, allows you place orders over the phone. The first 20 calls in a month are free, for the balance you pay a steep rate of Rs 25 per call. With each call, you can place a maximum of five orders.
InvestSmart Online has a toll free number for teletrades and it comes free of cost.
Research
What sort of research and information will the online broker offer you? Does this come at no cost to you?
Are the newsletters weekly or monthly? Are they sent via e-mail or are they posted on the Web site?
Do they intimate clients when a new issue is being launched? Are stocks and Initial Public Offerings regularly analysed?
Motilal Oswal is known for its research; they also claim to provide information throughout trading hours on what calls to take on various stocks.
Transfer of money
When trading online, you will need three accounts: a demat account for your shares, an internet banking account where your money is kept and a trading account which allows you to transact online.
With ICICI Direct, the transfer will be instant from your ICICI Bank account into your trading account. Ditto with HDFC Securities and HDFC Bank.
With India Infoline, the banking gateways are ICICI Bank, HDFC Bank, Citibank, Centurion Bank and UTI Bank. Basically, it means that India Infoline has partnered with these banks and you should open an internet account with any of them. It should take around 30 minutes to get the money transferred from your bank account into your trading account when you need to buy shares.
If you trade with Motilal Oswal, there is instant transfer of money from HDFC Bank. But with ICICI Bank, IDBI Bank, Oriental Bank of Commerce and UTI Bank, it should take around 30 minutes for the money to get transferred.
As long as your money is in the savings bank account, you will get the required rate of interest. Once you allocate it for trading, it shifts to the broker's account and then you do not get any rate of interest.
But, with ICICI Direct, you will continue to earn the rate of interest. This is because you will have to open a savings account linked to trading. You allocate funds from your savings account for trading. This money will continue to earn the rate of interest till you use it to buy shares.
Trading limits
Don't be under the notion that if you have just Rs 5,000 in your trading account, that is all you can trade with.
Trading limit
The trading limit is the maximum exposure a customer can have at a time. Exposure refers to the amount of money you can buy shares with.
How is the trading limit determined?
You will have to have some cash or shares deposited in your trading account. This is referred to as the Margin.
Your trading limit will be a multiple of this Margin (more information on this below).
Now you will have to figure out how this trading limit is calculated and if you can afford an online broker who demands a high Margin.
For instance, let's say you have Rs 5,00,000 in your trading account. This is your Margin amount.
The broker may either give you a direct amount based on this, like three times this amount will be your trading limit -- Rs 15 lakh (Rs 1.5 million). You have this much to play the stock market.
Or, the broker may have a different calculation. For instance, he may take 50% of the amount (Rs 2,50,000) and then give you five times that amount. You will be able to trade with Rs 12.5 lakh (Rs 1.2 million).
What happens if you don't have the money?
What if you buy shares worth the entire Rs 12.5 lakh but have just Rs 5,00,000? Ask the broker what the penalty is.
The broker will make the payment on your behalf and charge you for it. Some broking houses will charge 18% per annum on the amount you owe them. Others will sell the shares you have deposited with them to recover the money.
Does the broker want you?
A broker may ask for a very high deposit (Margin), much more than what you can afford. Check out what the Margin is.
ICICI Direct asks that one maintain Rs 5,000 as the quarterly average balance in the savings account linked to the trading account.
Motilal Oswal offers types of accounts.
Value account: Rs 3,00,000 in cash or Rs 6,00,00 worth of securities (shares).
Freedom account: Rs 5,00,000 in cash or securities or a combination of both.
Easy Account: Rs 5,000.
Other factors to consider
1. Is the portfolio (the shares you hold) automatically updated every time you buy or sell? Or do you have to manually update it? Ditto with your demat holdings.
2. Is the broker registered with the Bombay Stock Exchange and the National Stock Exchange? If yes, then you will be able to trade on both.
3. Is a free trial period offered? If yes, you could try it out before you commit to opening an account.
4. Do they sell mutual funds? ICICI Direct does. The others may not, but if you call and leave your contact details, they will send an agent over.
Do your homework
Browse through the Web site. See how easy/ difficult it is to access information. Ask for a demo. Go through the online demo and see how comfortable you are with it.
A big requirement in online broking is the broker's technological capability to ensure speed and safety of trading. Snoop around to figure out various people's experiences with online brokers.
Talk to your friends, colleagues, relatives, neighbours. Do they have problems logging on? Is the connection often slow? Is the web site 'down' often? Does it 'hang' a lot? How responsive and helpful are the staff?
Tomorrow: Reader feedback on online sites.
Note: The examples are only indicative and not exhaustive. They do not cover every player in online broking. If you would like to check what the various players are offering, here are the website links.
What was your experience in interacting with online brokers? Would you like to share it with other readers? We would love to hear from you!
Part I: Want an online stock broker?
Part II: How expensive is an online broker?