Most of the modern banks have their own stock broking arms. These banks have the requisite permits for operating stock broking business from the regulators. Some banks even offer many of its financial services like life and general insurance through these online investment accounts. Users can open their investment accounts with the banks where they have their savings accounts and directly start trading.
While these investment accounts offered by banks have some advantages, they have their own problems. Below are the pros and cons of opening a stock broking account with your banks and independent stock brokers:
Investment Accounts Offered by Banks
Investment accounts offered by banks are directly linked to the savings accounts of customers. The combination of savings, demat, and trading accounts makes it a 3-in-1 account. Cash to be used for purchasing shares and mutual funds will be directly transfered from the bank account just at the time of the transaction. This removes the hassle of transferring cash by entering the net banking password every time. As mentioned in the introduction, banks offer multiple products through their investment accounts like life insurance, mutual funds, general insurance, and fixed deposits. This facility makes it possible for consumers to manage all their financial products with a single account.
Brokerage charged on equity trading and annual account maintenance charges will be higher in the case of investment accounts offered by banks. Many banks don’t offer margin trading facility for day traders. This means that day traders can’t get any temporary credit for the equity investments made by them. Banks mostly provide investment accounts only to people who keep a savings account with them. Business model of banks mainly focus on deepening their relationship with their exiting customers and increase revenue generated per customer. This limitation poses a big problem when the time comes for shifting their savings accounts from one bank to the other. As banks permit linking their investment accounts with savings accounts of other banks, customers will not have any option other than closing their existing investment accounts. Fresh investment accounts need to be opened with the new bank where they have moved their savings account.
Investment Accounts Offered by Stock Brokers
Investment accounts offered by independent brokers are not linked to any one particular savings account. Customers can link their investment accounts with multiple banks. This facility makes it easy for customers to shift their savings accounts from one bank to other with out closing their investment accounts. Online investment accounts offered by stock brokers are a lot cheaper than those offered by banks. Brokerage, commission on the purchase of mutual funds, and the recurring annual maintenance charges levied by independent stock brokers are comparatively lesser than those charged by banks. Heavy traders and people with bigger portfolios also get a good discount on these charges. Some stock brokers don’t charge any commission on purchases of mutual funds from consumers as they are paid by the Mutual Fund Companies directly (AMCs). Almost all stock brokers allows margin trading depending on the profile of the customer.
Even though many stock brokers now offer a range of financial services to their customers, they can’t match the product variety of banks. Insurance products are still not offered by many stock brokers. Savings and investment accounts of stock brokers are not connected automatically. Cash needs to be moved to and from savings to investment account by the customer manually.
Conclusion
The choice is clear. People who use their trading/investment accounts purely for the purpose of long term investment and those who don’t change their savings accounts between banks often can go for investment accounts offered by banks. The higher brokerage charged by banks and the lack of margin trading facility will not pinch them. More over the availability of a wide range of financial products through a single account brings in a lot of convenience.
But for people who trade regularly on the stock markets and who don’t need any seamless connectivity between their savings and investment accounts, having an investment/trading account with independent stock brokers can be the right choice. They are cheap and come with lesser restrictions.
