Stock Broker: Definition, History, Types, How to choose, Role

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Written by Arjun Remesh | Reviewed by Shivam Gaba | Updated on 4 March 2024

Stock brokers play an intermediary role in facilitating trading on stock exchanges and helping investors participate in the exciting world of the stock market. Stock brokers execute buy and sell orders on behalf of clients, providing access to public securities. Brokers can be categorized as full-service or discount based on the suite of offerings.

Full-service brokers provide value-added research, recommendations, portfolio management and advisory services to aid investing decisions, whereas discount brokers focus solely on cost-efficient online trade execution. Irrespective of the type, brokers undertake responsibilities like market analysis, suitability checks, transaction settlement and maintaining custody of client funds and holdings.

Tracing its origins to early joint-stock companies and trading floors, the broking profession has significantly evolved alongside technological advancements and regulatory reforms. From open-outcry exchanges to electronic platforms, brokers today leverage robust digital infrastructure for a seamless experience. Selecting a reputed broker is crucial, with factors such as fee structure, trading platforms, research capabilities, reliability and customer service holding importance. This article delves deeper into understanding the brokerage ecosystem and how investors can navigate the options to find the best fit.

What is a stockbroker?

A stockbroker is a professional who buys and sells stocks on your behalf. Stockbrokers work for brokerage firms or investment banks and execute trades on stock exchanges. Their role is to serve as an intermediary between buyers and sellers in the stock market.

What does a stock broker do?

A stock broker is a licensed professional who executes buy and sell orders for stocks, bonds, commodities, and other securities on behalf of clients. Stock brokers work for brokerage firms or investment banks and facilitate transactions on stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). They serve as an intermediary between buyers and sellers in the Indian stock market.

The main responsibilities of a stock broker revolve around making trades and providing investing guidance based on research and analysis. They will engage a stock broker to help them execute trades and build a profitable portfolio over time when a client wants to invest in the stock market. The stock broker will first assess the client’s financial situation, investment objectives, time horizon, and risk tolerance. This information helps the broker determine an appropriate asset allocation and investing strategy for the client.

What is the history of stock broking?

The origins of stock broking are able to be traced back to the early 1600s when the first recognized joint-stock companies were formed in Europe. The Dutch East India Company is considered the pioneer of issuing public stock as a means of raising capital for its trading ventures. Stock quickly evolved from simply representing ownership in a company’s earnings to becoming a tradable financial instrument in its own right. Modern stock broking began taking shape in the 17th century as stock exchanges started emerging across Europe.

The Amsterdam Stock Exchange, established in 1602, was the first “modern” securities exchange created by the Dutch East India Company to provide a structured marketplace where stock could be traded. The London Stock Exchange formed in 1698 and the New York Stock Exchange opened in 1792.  During the 1800s, stock broking started to become a distinct profession as the equity markets expanded rapidly in lockstep with the Industrial Revolution. The telegraph revolutionised stock broking in the mid-19th century by allowing buy and sell orders to be communicated nearly instantaneously across long distances.

In India, the origins of organised stock trading are traced back to the 1850s, with the establishment of the Bombay Stock Exchange in 1875 as the first stock exchange in Asia. In the 19th century, brokers largely traded in government securities and shares of banks. Trading volumes were relatively low until the 1980s, when economic liberalisation triggered a boom in the Indian stock markets. The Securities Contracts Regulation Act of 1956 formally regulated stockbrokers, requiring registration with exchanges to conduct business. In 1992, the Securities and Exchange Board of India (SEBI) was established as the regulator for securities markets, introducing rules around certification, registration, and conduct for stockbrokers.

This was a major development.  A few years later, the National Stock Exchange (NSE) in 1993 introduced electronic screen-based trading, replacing the prior open outcry system and increasing efficiency and transparency. Other key developments were the deregulation of broker commissions in 1996, allowing discount brokers to emerge and drive commission prices down, as well as the dematerialization of shares through depositories like NSDL and CDSL which eliminated physical share certificates. Internet and mobile-based trading platforms also became very popular given high mobile penetration in India, expanding retail investor access.

What are the types of stock brokers?

There are three different types of stock brokers including direct access broker, full service broker and discount broker.

1. Direct access broker

A direct access broker provides investors a direct connection to the stock exchange without going through any intermediaries. This allows investors to directly place trades themselves rather than relying on a broker. The key advantages of a direct access broker are greater trade execution speed and lower trading fees compared to full service and discount brokers.

For example, an investor using a direct access brokerage directly submits their buy or sell order electronically to the exchange through the brokerage’s trading platform. This avoids any delays that come from relaying the order through a human broker. Orders are executed within milliseconds, allowing the investor to capitalise on short-term price movements in stocks. Additionally, direct access brokers typically charge much lower trading commissions and fees compared to full service and discount brokers.

In contrast, a full service broker provides advice, research, and trade recommendations to clients. Orders must go through the broker, which leads to slower execution. Full service brokers also charge the highest fees, which pay for all the additional services provided. A discount broker simply executes trades without advice, but still routes orders through a trading desk rather than direct market access. Trade execution and fees are better than full service brokers but not as good as direct access.

2. Full service broker

A full service broker provides extensive services like trading advice, investment research, and financial planning to clients. For example, a full service broker provides a client with research reports on stocks to consider buying, advice on constructing an investment portfolio, and provide trade recommendations and execution. 

The key difference between full service and direct access brokers is that full service brokers act as intermediaries for trades. Clients must go through the broker to place orders which leads to slower execution speed. Direct access brokers instead offer direct market access for faster trade execution. Full service brokers also charge the highest trading fees and commissions to offset the costs of providing personal advice and other services.

Compared to discount brokers, full service brokers provide much more personalized services and advice. Discount brokers simply execute client trades without any additional input. Full service brokers offer ongoing investment guidance, retirement planning, and other proprietary research. The higher fees charged by full service brokers pay for these additional services. Discount brokers only provide trade execution and charge lower commissions.

3. Discount broker

A discount broker executes stock trades for clients at reduced commission rates compared to traditional full-service brokerages. For example, a discount broker like Zerodha charges around ₹20 per trade while full-service brokers like ICICI Securities charge ₹750 or more.

The key difference between discount and direct access brokers is the execution method. Discount brokers route orders through a trading desk rather than direct market access. This leads to slower execution speeds than direct access brokers who offer a straight-through processing to exchanges. However, discount brokers charge significantly lower fees than direct access brokers.

Discount brokers also provide fewer services compared to full-service brokerages. Full-service brokers offer personalised advice, research reports, retirement planning and more. But this comes at a much higher cost through various account fees and higher trade commissions. Discount brokers only execute trades and do not provide all the additional services that justify the higher costs of full-service brokers.

The three main types of stock brokers are direct access brokers that offer fast trade execution through direct market access but charge higher fees, full service brokers that provide personalised advice and services but have slower execution and higher costs, and discount brokers that focus on low-cost trade execution without all the additional services.

Who are the top stock brokers in India?

This table showcases the top stock brokers in India.

The top stock brokers in India offer a range of services, pricing and platforms to suit different types of investors. Leading discount brokers like Zerodha, Upstox and 5Paisa focus on keeping costs low while full-service brokers like Angel Broking, ICICI Direct, HDFC Securities, Kotak Securities and IIFL Securities provide research and advisory services for a higher fee. Other notable brokers include Fyers, Motilal Oswal and Edelweiss Securities. Investors should evaluate their specific needs and choose a suitable broker accordingly. Having an account with a reputed broker that offers robust trading platforms is able to help investors effectively participate in the stock markets.

How to pick the correct stock broker for yourself?

The key factors to consider while selecting a stock broker is research and compare brokers, evaluate broker reputation and trust, analyse trading, platforms and tools, understand fee structure and account types, check investment products on offer, customer service and grievance redressal, ease of account opening and technology, research reports and advisory services, review safety of funds and securities, understand broker business continuity plans, check trading volumes and liquidity and evaluate value added services. While cost is important, don’t compromise on reputation, compliance and ethics.

Verify the broker is registered with SEBI and check for any major negative incidents, penalties or lawsuits involving the broker. Reputed brokers like HDFC Securities with long operating history, transparency and strong compliance practices make ideal choices. The trading platforms, apps and tools offered by the broker should be evaluated. Check platforms are reliable and offer features like detailed market data, charts, trading, research reports, scanning and more. Brokers like Angel Broking and Upstox offer good trading platforms and mobile apps.

Brokers offer access to investment products like equities, derivatives, currencies, commodities, mutual funds, IPOs, bonds etc. Analyse your investment needs and see which broker provides access to all the assets you wish to trade in through a single account. You need reliable customer support in case any queries or issues arise. Evaluate broker’s service standards, grievance redressal process, response time and infrastructure before opening your account. Most top brokers have good customer service in place.

What is the role of a stock broker in the stock market?

The primary role of a broker is to execute trading orders on behalf of clients. Clients are able to place orders to buy or sell stocks, derivatives, currencies etc through the broker who will then execute the trades on the exchange. Brokers undertake activities like order placement, order matching, settlement and clearing of trades. Without a stock broker, it would be extremely difficult for an individual investor to directly access the stock market and seamlessly execute trades.

The broker handles all the complex back-end processes. Brokers enable investors to gain access to the stock market and trading infrastructure provided by the exchanges. To trade on an exchange, having a broker account is mandatory. The broker handles the submission of documents for exchange registration on behalf of the client. Through a single broker account, clients are able to potentially trade on multiple exchanges like NSE, BSE, MCX etc rather than directly deal with numerous exchanges.

Brokers offer trading platforms and terminals to clients like web-based platforms, smartphone apps, desktop software etc. Through these platforms provided by the broker, clients are able to place orders, access live market data, analyse trades and obtain research reports. Easy and convenient access to markets is enabled through the robust trading infrastructure put in place by the broker. Zerodha, Angel Broking and ICICI Direct provide user-friendly trading platforms. Full-service brokers such as ICICI Direct and Motilal Oswal provide research reports on companies, sectors, macroeconomic outlook etc to help clients make informed investment decisions. Advisory on buy/sell timing, target pricing, asset allocation sometimes also be provided.

Does a stock broker provide stock advisory service?

No, a stock broker facilitates buying and selling of stocks for clients but does not typically provide personalised stock advisory services. Not all types of stock brokers have the capability to provide stock advisory. It depends on their business model and service offerings. There are two main types of stock brokers in India – full service brokers and discount brokers. Reputed full service brokers like ICICI Direct, HDFC Securities, Kotak Securities, Motilal Oswal and IIFL Securities have dedicated research teams that provide stock advisory services to clients.

What is the requirement to become a stock broker?

Aspiring stock brokers must pass qualifying exams, obtain necessary licences, and find employment with a brokerage firm to buy and sell securities on stock exchanges on behalf of clients. The minimum eligibility is passing 12th grade in any stream. However, most aspiring brokers have an educational background in finance like B.Com, M.Com, MBA Finance, CFA etc which is preferred. Strong numerical, accounting, trading, compliance knowledge is an advantage. Candidates have to clear 2 National Institute of Securities Markets (NISM) certification exams – NISM Series VIII: Equity Dealer Certification Exam and NISM Series V-A: Mutual Fund Distributors Certification. These exams test knowledge of equity trading concepts, regulations, compliance and ethics standards. The NISM certifications are mandatory to become a stock broker. Exams are held in test centres across India. Candidates have to register and pass the exams.

In order to legally function as a stock broker in India, registration with the Securities and Exchange Board of India (SEBI) is mandatory. The process begins with submitting an application to SEBI in the prescribed format, along with all required documents. The applicant must ensure compliance with the eligibility criteria laid down by SEBI, which includes maintaining the specified net worth and deposit requirements. SEBI then conducts an inspection and evaluation to verify if the applicant meets all regulatory requirements. Upon clearing this inspection, the applicant receives final approval from SEBI in the form of a registration certificate. Only after obtaining this SEBI registration a stock broker is able to legally operate in the Indian securities market. The registration must be renewed periodically by submitting the required documents. The registration criteria covers financial strength, infrastructure, competence etc. The process takes 2-3 months.

Besides obtaining registration from SEBI, a stock broker is also required to acquire membership of at least one stock exchange such as BSE, NSE or MCX to be able to operate. The broker must apply to the stock exchange in the prescribed application form and meet the eligibility criteria in terms of compliance capabilities and capital requirements. The stock exchange evaluates all membership applications based on the broker’s ability to fulfil compliance requirements laid down by the exchange. Upon selection, the broker has to pay the applicable membership fees, security deposits and meet the base minimum capital requirement set by the exchange. After approval, the exchange issues a Unique Member Code to the broker that allows him/her to execute trades on that exchange. Stock exchange membership has to be renewed periodically by submitting audit reports and other documents mandated by the exchange.

What is a robo advisor?

Robo-advisors are automated digital platforms that provide investment advice and portfolio management services online with minimal human intervention. Using algorithms and technology, they offer customised investment recommendations, portfolio creation, rebalancing and optimization to retail investors based on their financial goals, risk profile and investment horizon. Robo-advisors aim to make investing and wealth management accessible to the masses in a cost-effective and convenient manner.