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Good stock brokers make fortunes, here’s how to select one

Reporting | - Posted: May 2, 2020 | Last Updated: 6 months ago
SAMAA |
Posted: May 2, 2020 | Last Updated: 6 months ago
Good stock brokers make fortunes, here’s how to select one

Photo: AFP FILE

In 1991, American energy giant Exxon decided to sell its Pakistan-based fertilizer business. Shaukat Raza Mirza, who was heading the business at the time, was confident about the company’s bright future and came up with the idea that the management should buy it from Exxon.

A reputable business leader, Mirza was able to persuade not only the management but also the factory staff and labor, to buy a stake in the company. They heeded his call. Some sold their homes, others sold their wives’ jewellery to invest in the company and become shareholders. After the management buyout, the first in the country’s history, they named it Engro, driven from the words ‘energy for growth’.

Over the next two decades, the management expanded this business more than 100 times, the stock did so well that the same early investors used these gains to marry their children off, educate them and build property.

Even today, Engro remains one of the top picks for graduates seeking jobs and its share is part of almost every fund manager’s equity portfolio.

Like Engro, there are many other listed companies which perform well on the Pakistan Stock Exchange because they are run by efficient managers. Investing in one of these companies today could change your fortune over the next decade or two. However, to buy their shares, you need the help of a stock broker, who has a license (trading right entitlement certificate) to trade at the bourse on your behalf.

There are hundreds of licensed brokers, so which one should you select? This question bothers new investors in particular and our audience often throws it at us. Selecting a good broker depends on several factors: market reputation, performance, client size, research and other services, to name but a few. In this article, Samaa Money, with input from securities analysts and brokers, has created a quick checklist that will help you select a good broker.

Checklist

1. Sponsors
Always check the sponsors behind your brokerage house. What is their market reputation? (Are they in news for the wrong reasons or facing any inquiry by the Securities and Exchange Commission Pakistan etc). There is a reason why market analysts do not hesitate when recommending a few names that you come across in the market time and again.

2. Size and performance
It is important to know how big a brokerage is and how well it has been performing. There is no public data to check their performance, but they are required to publish financial statements and capital balance statements on their website by law. These documents can give you a good idea of their financial health. A look at the brokerage’s net capital balance and bank balance pertaining to clients can help you understand how big they are and how much they can trade. This information can be found in the capital balance statement.

3. Research and other services
Always ask your broker about any value-added services they can offer. For example, in-depth research can help you make better and timely decisions. Are they providing portfolio tracking apps, in-app news feeds and online trading facilities?

4. Sales team
Not all traders may provide online trading or in case you opt out of this, it is then important to see if the sales team is good and customer-friendly. Do they offer timely advice regardless of how small your investment is?

5. Commission
When surveying the brokerage market, you should try to compare brokerage fees or the commission each one is offering for their services. Always ensure you get value for the money you pay them.

This checklist may help you find a good broker, but at the end of the day, it is your money. You just can’t forget after you have invested. You must keep a close eye on news that moves the market, and particularly the stocks you are invested in. Follow financial publications that cover the stock market.
Most analysts recommend going to a big broker but that may come with its own problems. For example, you may be a small investor at a large brokerage firm, and timely advice may not be instantly available. Therefore, some understanding of how the stock market works and which shares to buy and when will help you do well. Samaa Money has done several programs that teach these things.

You can find the list of licensed brokers at the PSX website, which publishes all the details you need to know about investing in the stock market. It’s a good idea to shortlist a few brokers based on your requirements and the above checklist and see which one offers the best deal. Once you have selected a broker, they will tell you the procedure of investment and provide you login credentials in case you are given an option to trade online.

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