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Over the last few years there have been a plethora of discount brokers who have
come up across India. These discount brokers are largely structured on the global
Charles Schwab model. The Schwab model is based on very low cost of trading and
virtually no research or value added services. The discount broker essentially provides
you a platform on the internet to trade shares as well as futures & options at very
low rates of brokerage. Of course, the STT on the value of the transaction will
continue at the extant rates since that is a statutory cost. First, let us understand
how discount brokers differ from full service brokers.
There are some fundamental differences between these two categories of brokers.
For example, discount brokers do not operate through franchises or branches but
purely leverage the power of the net. In fact, most of the discount brokers prefer
to also offer a downloadable app on Android and IOS so that people can even trade
on the go using their mobiles or notepads. Secondly, while a typical full-service
brokerage would charge 03%-0.5% as brokerage on a delivery trade, the discount brokerage
would even go down to a fixed rate of brokerage of Rs.10 per trade or Rs.15 per
trade just to enhance the customer’s trading activity. Full service brokerage is
suitable for investors who are looking at hand-holding, continuous advice and research
support and also ease of offline transactions. Discount brokers do not offer any
of these services except call ‘n trade facility more as an adjunct to their online
trading platforms. While full-service brokerage will give you funding support, discount
brokerage will allow normal trading leverage but that too will be machine driven
and hence dependent on strict risk management.
Most discount brokers charge on a per trade basis in case of cash equities and on
a per lot basis in case of F&O trades. The low brokerage induces the clients to
trade more aggressively and the lower rate is compensated by the frequency of trading
by the client. Since discount broking is centrally manned and relies more on machines
to do the RMS, the low cost works to their benefit. Also, discount brokers do not
require add-on support in the form of advisors, traders and analysts and thus the
cost of trading comes down substantially. There are hidden charges you need to be
wary of. For example there are some discount brokers who charge more for intraday
and less on delivery so that as traders churn more, they actually earn more brokerage.
Very importantly, the discount brokers work on net positive funding basis. Since,
the trades have to be pre-funded by the client; the broker is always on positive
float. That is the biggest reason that discount brokers still make money.
The distinction between full-service brokers and discount brokers is actually not
so straight forward. Even full-service brokers offer a low cost model to their premium
and high turnover clients. It is just that the larger mass of infrequent traders
still pay a higher brokerage which takes care. The moral of the story is that discount
broking in India is here to stay. Customers have to choose what best suits them.
The truth probably lies somewhere in between!