A stock broker is a middleman between you and the stock exchange. You cannot directly access the stock exchange to buy or sell shares. You need a stock broker to help you with the process.
When you decide to trade, you place an order using your broker's platform, such as a website or mobile app. The broker then sends your request to the stock exchange and ensures the trade happens smoothly.
Stock brokers do more than just process trades. Many brokers offer additional services like research reports, tools to analyse stock performance, or tips to help you make better decisions. Some brokers specialise in offering advisory services, where they guide you on what to buy or sell based on your financial goals, or they may manage your entire portfolio if you prefer professional assistance.
Types of stock brokers
There are two main types of stock brokers:
- Full-service brokers: Also known as traditional brokers, these brokers offer a full range of services, from trading to portfolio management and advisory. They charge a higher commission for these added services and are suitable for investors looking for guidance and support.
- Discount brokers: Discount brokers focus on providing basic services for trading and investing. They offer a demat account, a trading account, and access to an online platform for executing trades. These brokers have become increasingly popular due to their ease of doing business and low commission charges, making them suitable for investors who prefer managing their portfolios independently.
How stock brokers are regulated
In India, stock brokers are regulated by SEBI (Securities and Exchange Board of India). SEBI ensures that stock brokers operate fairly, transparently, and in the best interest of investors.
Stock brokers in India must follow several laws. Here are a few of them:
- The Securities and Exchange Board of India Act, 1992: This law gives SEBI its power to regulate the stock market and brokers. It ensures that brokers follow rules and helps maintain trust in the market.
- The Securities Contract (Regulation) Act, 1956: This law governs the trading of securities like stocks and bonds in India. It lays down the rules for how stock exchanges and brokers should operate.
- The SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992: These regulations deal with how stock brokers and their sub-brokers should function. It includes rules for registering brokers, maintaining proper records, and handling client funds securely.
These laws protect investors. They require brokers to follow strict processes for handling your money and ensuring your trades are executed properly. SEBI monitors brokers to make sure they don't engage in fraud, manipulation, or unethical practices.
If brokers violate these rules, SEBI can impose penalties, cancel their registration, or bar them from operating. This regulatory framework maintains trust in the stock market and ensures that investors' money is safe.