Avoid brokers who offer high leverage; they're very risky and could go bust

You should also avoid brokers with a high level of debt in their balance sheets; Move your account to another broker if the one you're dealing with delays making payouts

Brokerages are leaving no stone unturned to attract new retail customers who have been entering the stock markets in droves in recent months. They have been showering them with inducements of all kinds — zero or low account opening fee and annual maintenance charge, gift vouchers to the customer and to the person who referred him, and so on. Instead of getting swayed by these considerations, customers should single-mindedly focus on selecting a broker with whom their money and securities will be safe over decades.

It is best to stay away from brokers who offer high leverage. “They are the ones who bend risk-management rules to attract customers and take the maximum risk,” says Nithin Kamath, founder and chief executive officer (CEO), Zerodha, the country’s largest stockbroker.

If the broker offers 4-5x leverage on stocks, that is fine, but you should stay away from those that offer 20x. Kamath adds you should also avoid brokers who have a high level of debt on their balance sheets (this document can be accessed from the Ministry of Corporate Affairs’ website by paying a small fee).

Information on the broker’s networth is also available in the balance sheet. “One with a networth of at least Rs 40-50 crore has a good amount of skin in the game and is less likely to cheat customers,” says Jimeet Modi, founder and CEO, SAMCO Securities.

Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm, adds that a broker should have at least 2,000 active clients. “Only if he has that many clients will he be able to meet his fixed costs and sustain a retail business,” says Jain.

Steer clear of brokers who engage in proprietary trading. “In many past scams, the broker incurred losses in proprietary trading, used customers’ money to make good the losses, and ultimately went belly up,” adds Modi. Information on whether the broker engages in proprietary trading is available in the account-opening form.

A series of related-party transactions involving large sums should also raise a red flag. Information on such transactions is available in the broker’s annual report. Also, check out if in the past the Securities and Exchange Board of India (Sebi) has levied massive penalties. This information can be accessed from the Sebi’s website.

Stay watchful even after you have become a customer. “If you ask for your money that has been lying with the broker and there is delay in making the payout, that is an early sign that the broker is in financial trouble. Shift to another broker at the earliest,” says Vikas Singhania, executive director, TradeSmart Online.

Avoid brokers who are always inducing you to trade — to generate revenue for themselves. If you receive reports from a full-service broker, read them to educate yourself. The buy-and-sell decision should, however, be your own. You could also take advice from an independent Sebi-registered stock advisor. Keeping advice and execution separate will enable you to avoid conflicts of interest and receive unbiased recommendations.