5 Reasons To Stop Trusting Your Stock Broker

Stock market investment is considered the smartest mode of investment. Over the years, it has delivered better returns than any other form of an investment i.e. Mutual fund, PPF, etc. Despite it being the most dynamic investment instrument, very few people opt for direct equity investment. The reason for this low turnout is that the stock investment is extremely complicated and demanding. Unlike other investment mediums, in the stock market, investors have to do their own research and analysis to find promising stocks to invest in. As the process to find good stocks is so lengthy and tedious, mostly investor prefer to stay away from the stock market.

However, those who overcome the barrier of complexities, confront another challenge - the stock broker. Yes, between you and stock market stands an entity called stockbroker. The general misconception is that stock brokers are there to help investors. But on the contrary, most of the times brokers end up helping the brokerage firms they work for instead of their clients. And in the process, leave the investors confused and disillusioned about equity investment.

Stock brokers know the market, they know how it functions and what should be the right approach. But here's the catch, they are mere employees of a brokerage firm which gains only when you (retail investors) do maximum trading. One can rely on their expertise but blindly following their advice may not be a very good idea.

Here Are 5 Reasons Why You shouldn't Listen To Your Stock Broker.

1. What Works For The Broker Doesn't Necessarily Work For You

This is the most important part of the broker-investor relationship, which sadly most of the investors fail to understand. Stock brokers work for brokerage firms and brokerage firms make money through trading. More trading means more brokerage for the firms. So your broker has only two objectives - 1. to bring maximum clients for their firm and 2. To make them trade as much as possible. Naturally, when your's and your stock broker's interests are not aligned, would his/her advice be in your best interest? Not really.

2. Brokers Hate Long Term Investment

The objective of a broker is to make his clients do as many transactions as possible as to get maximum business for the brokerage firm. In this regard, long-term investment is the idea which runs exactly opposite to that. For brokers, long-term investment simply means NO brokerage at all. In long-term investment, you buy the stock with the long-term perspective. In this scenario, there is no frequent buying and selling of the stock as the investors want to reap full benefits of the bought stock. Let's be clear, long-term investment, though good for investors, is not in the interest of brokers. So they will try everything to change your mind with enticing schemes e.g. 'Stock of the day', 'Guaranteed Profit', etc. But, if you are not a professional trader it's best to stick to your long-term investment plan.

3. Broker's Love Intraday Trading & Derivatives (F&O)

Stock brokers love short-term investment. In fact, instruments like intraday, Buy Today Sell Tomorrow (BTST) and Future and Options (F&O) are usually their favourites. A point to note here is that 98% investors lose money in all the above mentioned instruments. However, brokers draw handsome brokerage from these transactions. Derivatives trading is the fastest way of losing money while intraday trading creates an illusion of money. These two are the most lucrative products for any brokerage firm. Needless to say, they will try to sell these products to you. But remember the words of Warren Buffett - Derivatives are financial instruments of mass destructions. Don't do it!

4. Brokers Suffer From I-Know-It-All Syndrome

The key characteristic of any broker is to impress upon the clients that he/she knows everything about the market and that you should blindly submit your money in their hands. Sometimes these gambles do pay off but its virtually impossible to pick a winner every time. Hence, sooner or later you lose money.

5. Brokers are not stock analysts, they are salesmen!

All the knowledge of the market that brokers display is not the market analysis but a sales pitch. Make no mistake, brokers aren't stock market analysts, they are salesmen with the only objective of meeting the sales target. The moment they get to know that you are in the market for long term investment they will lose interest in you and won't bother you again.