Introduction

▪ What Is the Stock Market?

The term stock market refers to several exchanges in which shares of publicly
held companies are bought and sold. Such financial activities are conducted
through formal exchanges and via over-the-counter (OTC) marketplaces that
operate under a defined set of regulations.

Both “stock market” and “stock exchange” are often used interchangeably.
Traders in the stock market buy or sell shares on one or more of the stock
exchanges that are part of the overall stock market.

▪ Understanding the Stock Market

The stock market allows buyers and sellers of securities to meet, interact, and
transact. The markets allow for price discovery for shares of corporations and
serve as a barometer for the overall economy. Buyers and sellers are assured of a
fair price, high degree of liquidity, and transparency as market participants
compete in the open market.

▪ How the Stock Market Works

Stock markets provide a secure and regulated environment where market
participants can transact in shares and other eligible financial instruments with
confidence, with zero to low operational risk. Operating under the defined rules
as stated by the regulator, the stock markets act as primary markets and secondary
markets.6

As a primary market, the stock market allows companies to issue and sell their
shares to the public for the first time through the process of an initial public
offering (IPO). This activity helps companies raise necessary capital from
investors.

A company divides itself into several shares and sells some of those shares to the
public at a price per share. To facilitate this process, a company needs a
marketplace where these shares can be sold and this is achieved by the stock
market. A listed company may also offer new, additional shares through other
offerings at a later stage, such as through rights issues or followon offerings. They
may even buy back or delist their shares.
Investors will own company shares in the expectation that share value will rise or
that they will receive dividend payments or both. The stock exchange acts as a
facilitator for this capita lraising process and receives a fee for its services from
the company and its financial partners. Using the stock exchanges, investors can
also buy and sell securities they already own in what is called the secondary
market.

The stock market or exchange maintains various market-level and sector-specific

indicators, like the S&P (Standard & Poor’s) 500 index and the Nasdaq 100 index,
which provide a measure to track the movement of the overall market.

❖ What Is a Brokerage Firm?

A brokerage firm is simply a place where investors and traders go to buy and sell
stocks. The firm acts as a middleman between buyers and sellers and provides a
trading platform for everyone. It charges a commission on these transactions.
Every time an investor buys a stock, a transaction fee is charged.

You can also start a share broking franchise business (a sub-broker franchise) and
give your company’s franchise to small and medium sub-brokers.

❖ Understanding a Brokerage Firm

Earlier, brokerage services were only available at the physical offices of firms. It
was when the Indian financial market followed an open outcry system. The
investors had to be present physically at the stock exchanges to buy and sell
stocks. The process was more based on luck as everyone shouted to place their
orders. However, SEBI, in 1993 started the shift towards digital trading where it
was mandatory to open a Demat account to hold the shares virtually. The circular
started a digital revolution and resulted in the introduction of online brokerage
firms.

To add the entities to create a brokerage business, SEBI created rules and
regulations on how to open brokerage firms in India. By starting a brokerage
firm, entities can onboard customers who want to open a Demat account and trade
in included financial instruments. A brokerage firm assists its customers to buy
and sell securities effectively, manage their Demat accounts and ensure their
transactions are completed.
Here are the types of brokerage firms:

• Full-Service Brokers:

These stockbrokers provide comprehensive services to clients, including

providing advisory assistance. They can help an investor gain insight into
investment opportunities. Typically, their brokerage fees are based on the
total amount of executed trades. These are generally well-established
market players, with a range of network offices/branches across the
country.

• Discount Brokers:

They charge comparatively lower fees as compared to full-service brokers.

Their services don’t include advisory assistance or market research to help
clients zero in on a suitable investment opportunity. Usually, they charge a
flat fee for undertaking stock market transactions.

• Brokers Charging Flat Brokerage:

These types of stockbrokers have gained popularity because of the

increasing use of digital technology in trading. They are a mix of both full-
service and discount stockbrokers, charging a flat rate brokerage fee.

Knowing what is a brokerage firm is the first step toward understanding how to
start a brokerage firm in India. However, the brokerage business also includes
a sub-business opportunity known as a sub-broking franchise where entities assist
brokerage firms in finding new customers and earning a commission in return.
You can also start a share broking franchise business (a sub-broker franchise) and
give your company’s franchise to small and medium sub brokers.

❖ What Is a Sub Broker Franchise?

A sub-broker is an agent of a broker, working with the client on their behalf. They
act as a link between the stockbroker and the client. A stockbroker entrusts the
sub-broker with multiple responsibilities, like sourcing clients, providing services
and client management. Sub-brokers receive a portion of the fees collected by the
stockbroker of the broking franchise. The broking firm can have a wide network
of operations across the country via different sub-brokers, who identify and
acquire new clients for the stockbroker.
A broking franchise gives the franchise to smaller brokers to expand its clientele
and make more money through the sub-brokers. Sub brokers are like freelancers
as they work with a certain degree of autonomy but utilise the brand name and
software of the main broker franchise. The brokerage earned from clients
(traders) is shared between the franchise and the sub-broker. Hence, the sub-
broking franchise is also a vital part of understanding how to open a brokerage
firm in India.

Knowing how to open a brokerage firm needs extensive knowledge about the
financial market. Starting a brokerage firm involves a lot of strategy,
documentation, and patience. Here are some essential steps to understand the
process of starting a brokerage business in India in detail:

1. Calculate Expenses
This step involves an equal amount of
planning and calculation. Once you make a
step-by-step plan of the entire process, right
from registration to the final opening of your
business, calculate the approximate cost of
each step. Take into account current costs of
all aspects as well as expected spikes in costs
in the near future. These will include, for
example, a base minimum capital deposit paid
to the stock exchange as a deposit as part of
the registration process with the exchange.
The amount of these costs depends on your
business specifics.

2. Choose Your Target Market

The process of how to open a brokerage firm in India can lean toward different
types of investors. Your share broking franchise business could be a luxurious
venture for ultra-high net worth individuals or even a small one that guides and
assists new investors by also acting as a business financial advisor. A lot of
brokerage firms offer advisory services these days. They not only buy and sell
shares for their clients but also offer overall financial advice in terms of where to
invest, how much to invest, where to save, etc. Your business financial advisor
services need to be strategized as per your target market and their level of
knowledge about trading.
 3. Determine Your Revenues
The process of starting your own brokerage firm also includes determining the
revenues. As per your target market and your expenses, you will be able to
determine how much you can charge your clients. You will need to set charges
for both trading and financial advice, or you can even choose to offer free
financial advice like a lot of new brokerage firms do in India currently. You can
also have a model wherein you provide special financial advisory services for a
charge.

4. Find Out How To Maximize Your Revenue

One of the most important factors in the process of knowing how to open a
brokerage firm in India is to know how you can maximise your revenues. Find
out what makes your brokerage firm different from the scores of others serving
the same target audience. Would you specialise in one type of financial advice?
You can charge extra for your speciality as a business financial advisor. Think
about how long it would take you to increase brokerage charges too.

5. Get An Office Space

Another essential is to get an office space that is enough for the number of
employees you plan to hire in your initial year. The office space should also
include various equipment such as computers, wifi etc to ensure you can work
effectively and assist the clients you onboard. Once you upscale, you will also
have more funds to move to a bigger space.

6. Cover All Legal Bases

For a brokerage firm, there are some specific registration and legal formalities.
The SEBI (Securities and Exchange Board of India) issues a registration
certificate. You will also need approval from stock exchanges and clearing
corporations. Once you meet SEBI’s ‘Fit and Proper’ criteria, you can apply to
stock exchanges via SEBI and obtain a certificate with your unique registration
number. You will also need to keep track of all penalties and rules binding upon
your organisation and employees.
 7. Name Your Company
Deciding a suitable name for your company is a creative as well as a logical
process. The name should reflect your company’s vision and suit its long-term
brand identity. It should also be short and simple enough for people to remember
and identify. Plus, you will have to
check some records to make sure that
the name won’t fall into legal trouble.
These include

– State business records

– Trademark records

– Social media research

– Web domain availability

Key Takeaways

• A brokerage company primarily acts as a middleman, connecting buyers

and sellers to facilitate a transaction.
• Full-service brokerage companies are compensated via a flat annual fee
or fees per transaction. Online brokers offer a set amount of free stock
trading but charge fees for other services.
• The lines are blurring, with full-service brokers launching phone apps and
online discount brokers adding fee-based services.

Brokers may work for brokerage companies or operate as independent agents.

❖ Understanding Brokerage Firms

In a perfect market in which every party had all of the necessary information,
there would be no need for brokerage firms. That is impossible in a market that
has a huge number of participants making transactions at split-second intervals.
The Nasdaq alone has in excess of 30 million trades per day.1

Brokerage companies exist to help their clients match two sides for a trade,
bringing together buyers and sellers at the best price possible for each and
extracting a commission for their service. Full-service brokerages offer additional
services, including advice and research on a wide range of financial products.
 ❖ Independent vs. Captive Brokerage
If you're buying or selling certain financial products, including mutual funds and
insurance, it's important to know whether your broker is affiliated with certain
companies and sells only its products or can sell you the full range of choices.

You should also find out whether that broker holds to the fiduciary standard or
the suitability standard. The suitability standard requires the broker to
recommend actions that are suitable to your personal and financial circumstances.
The higher fiduciary standard requires the broker to act in your best interests.

Independent Brokerage

Registered investment advisors (RIAs) are the most common type of independent
broker found today.

Independent brokerages are not affiliated with a mutual fund company. They may
be able to recommend and sell products that are better for the client.

They are required to hold to the fiduciary standard, meaning that they must
recommend the investments most in the client's best interest.

Captive Brokerage

A captive brokerage is affiliated with or employed by a mutual fund company or

insurance company and can sell only their products. These brokers are employed
to recommend and sell the range of products that the mutual or insurance
company owns.

The products they recommend may not be the best choice available to the client.

✓ Is It Worth It to Use a Full-Service Broker?

People who use full-service brokers want the advice and attention of an expert to
guide their financial affairs. These are usually complex, as these clients tend to
be high-net-worth individuals with complex financial affairs. They are willing
and able to pay an average of 1% to 3% of their assets per year for the service.

People who use an online discount broker may feel confident in their ability to
handle their own finances and make their own decisions.
 ✓ How Does a Brokerage Firm Work?
A broker is essentially a middleman. Brokers match buyers with sellers, complete
the transaction between the two parties, and pocket a fee for their service.

If you use an online brokerage to buy stock, there's no human standing between
you and the transaction. The brokerage software makes the match.

If you use a full-service brokerage, the process is much the same, except that
someone else is pressing the keys on the keyboard. However, the full-service
brokerage may have identified a good investment opportunity, discussed it with
the client, and acted in the client's behalf in making the transaction.

How Does a Brokerage Firm Make Money?

Generally, brokerages make fees for every transaction. The online broker who
offers free stock trades receives fees for other services, plus fees from the
exchanges.

Full-service brokerages increasingly charge a so-called wrap fee, an all-in-one

charge for all or most services, This is usually 1% to 3% of the amount in the
client's account per year and covers advisory services and investment research as
well as trading fees.
 Conclusion

A broking business is one of the most in-demand businesses at a time when the
Indian financial market is adding a huge number of customers. As the investment
amount is on the rise, starting a brokerage firm is one of the best decisions you
can make. It will allow you to earn substantial brokerage through every
completed order of the clients you onboard in your brokerage firm.

Now that you know how to start a brokerage firm in India, you are well
equipped to start a broking business and start your professional journey in the
stock market. However, there are risks involved in every business, and it is
important to be wary of them. But keeping a positive mindset and an aware sight
is what will make all the difference as an entrepreneur. You can also partner with
organisations that ease the process for you, like India Infoline. This would benefit
you as they have existing expertise and experience in the field.