Well, you hear the word DISCOUNT and comes to the temptation of getting something for a cheaper price. But you would agree with me that it also brings a sense of caution. Caution in the sense that you worry about brand, product quality, service standards, convenience, after sales support etc. Just like everything else in your life, when it comes to Investments, you should be equally careful of Discount. It becomes imperative for you to see whether the discount brokerage offered by your discount broker is truly a discount or it’s a disguise.
It takes just a few hours for you to analyze the facts & figures and dispel the myth of discount brokerage if your broker has presented it so. Remember, even when you buy your daily grocery and assuming that you spend just 2 mins a day in bargaining or checking the quality beyond discount, in a year alone you spend 30 hours behind decoding the grocery discounts. Will it not be worth spending just 30 minutes decoding the myth of discount brokerage and making investments more rewarding for you?
Merely by a broker naming itself as discount brokerage or saying that it offers Zero brokerage or lowest brokerage doesn’t mean that it actually would be a discount to you. These lines to me, sound less of a Product Offering and more of Marketing Gimmick. Makes Sense, here is what you can quickly check with respect to the discount brokerage plans of a broker.
Is your discount broker stealing money out of your pocket?
What in discount brokerage lures investors/traders?
Discount brokers offer you flat brokerage plans such as Rs 15 per order or Rs 20 per order kind of tariff. Irrespective of the size of your order, you are charged a flat fixed brokerage fee. On the face of it, you believe it’s going to making significant savings in returns of reducing your cost of trade but that’s not true always.
Let’s take an example of Cash Market trades at NSE. National Stock Exchange (NSE) shows historical data on its site and a quick look of this, you would see that average order size is around 25-30K, that too when the institutional trades are also included in this. It requires no mathematics to derive that retail clients trade size would be much much smaller. For the discussion purpose, let me assume that it is 20K. a brokerage of Rs 20 per order in this case essentially means .10%, and this, by the way, is a higher brokerage even if you compare with many full-service brokers’ offerings.
When I speak to my friends at various brokerage houses, trying to understand what is the loss of brokerage revenue that they are facing with discount brokerage products, they state that the loss is not more than 20-25% and this is very well taken care of by the additional charges that are in-built into the discount brokerage products.
Before you decide to open your online trading account with any Discount Brokerage or so-called Zero Brokerage players, there are 6 Important Points that you must deep dive, collate facts and compare the brokers. See it yourself whether discount brokerage plan is a myth or it is indeed a deal to you.
6 Point Assessment for discount brokerage
1. Hidden charges
The word hidden makes you think twice and when I suffix Charges, you feel as if you are on the verge of being fooled. Yes, it brings the sense of trick & disguise. This is where you bleed the most. There are quite a few charges where I have seen the brokers tweaking & disguising things. Let’s see them one by one:
i) Fund Transfer Charges
I find it surprising. Your money when you take into your trading account or you withdraw OUT of your trading, discount brokers levy some fees (ranging from 10 to 20 in each case as I observed). In many cases, this comes even more than the brokerage that you pay.
ii) Call n Trade Charges
Sounds weird but for every time you call & put in trade order, discount brokers silently levy you a call and trade charge. What’s more atrocious is that in many cases these charges are being levied for just making a call, even if you don’t trade.
iii) Software Charges
Discount brokers give you online & mobile trading applications for free as a general practice. But some of the low-cost brokers have also tweaked it a bit. The online trading platform given for free is the basic one and if you want an advanced trading platform, they would ask you to one-time subscription or even annual charges for the same.
iv) Statutory Fees
When you trade, there are some statutory charges involved as well. These include – GST, STT, Stamp Duty, Exchange Transaction Charges & SEBI Fees. Though these charges are fixed by different regulators and authorities, still the brokers inflate some of these charges by a considerable %age. The most commonly tweaked points are Exchange Transaction Charges & Stamp Duty. As an Investor, you assume that these would be standard as they are decided by the regulators but the fact is that many discount brokers earn their pie of revenue from these.
For example in NSE Transaction Charges in case of Equity Delivery is Rs 325 per crore and you should not be surprised if your broker has calculated & billed this to you at a higher rate of 500 or even more. Same is the case with stamp duty. Trust me; it is not difficult to check these gaps at all. You go the exchange’s website and you get all the information. Then do a trade with your discount broker and look at the contract note, you would figure out the leakage points.
What I find even more surprising is that some of the brokers when they see that aware clients have started looking at contract notes and comparing the charges, then they don’t levy the charges on contract notes rather directly bill them in the ledger. It is just a crude & intentional attempt to fool the customer in the name of discount brokerage and instead bill him higher cost trick fully.
2. Personalize local support
Discount Brokers normally operate on a completely online model. The reason why they can think of low-cost product is that they don’t have local presence & personalized relationship support, which reduces their cost of business.
Hence Discount Brokers don’t have the local presence and lack the infra to provide personalized support to clients. Though if you are a DIY (Do-it-Yourself) kind of customer who loves doing things online and enjoys transacting thru mobile applications, you may not have to look for local support at all. But remember when I say mobile applications, I am not talking about using FB or Whatsapp or some news sites etc.
My reference is strictly to transacting online such as using mobile apps of banks, mobile wallets, online shopping, ticket bookings etc. If you are conversant with these kinds of apps, then for sure you can classify yourself as a DIY customer & then your dependency on a local support is negligible.
3. Add-on services
Traditional Brokers provide you additional services such as research reports, trading tips, recommendations etc which in case of Online Discount Broker is not prevalent. Imagine if you are not a frequent trader and you are more of a middle-class investor, then in my personal opinion, here you have an edge if you are with discount brokers.
In the name of so-called research reports & tips you often get lured by promises of high returns which is like multiplying you risk “n” no of times. The brokers drive you to trade more so that you generate more brokerage for them. They hardly care as what ultimate profits you are making in your portfolio.
Moreover, there are hundreds of such sites where you can find extensive research reports, analysis and stats. And they are better places for reference than any broker’s platform. Because at least those sites won’t have any direct vested interest to make you trade more.
4. Margins & funding
If you are a beginner or an investor, Funding may not be your cup of tea but for little older traders, Margins & Funding become two of the key decision-making points while choosing a broker.
Discount brokers don’t allow you leverages over and above the standard limits. Whereas full-service brokers bring the flexibility in terms of leveraging. The margins, accept payments thru cheques, higher trading limits and if required even funding your trades. None of the discount brokers allow funding & practically also they can’t ever do this.
From the broker’s perspective, if you look at it, the Online Discount Broking business gives them faceless online customers where the counterparty risk to the business is very high which restricts them to offer additional limits & leverages to you. Suppose, you are a trader, trading on own funds and do not require any extra limits or leverage. Then there is no difference on this parameter for you between a discount broker and a full-service broker.
5. Investment options
Though in general, you may not be able to spot this difference. But Online Discount Brokerage platforms normally restrict the scrips or contracts that you may trade. I had seen on many of these platforms not allowing a volatile stock to be traded on many occasions, not allowing to buy a slightly illiquid F&O contract at times.
Well, I understand that there may be a risk for the investor. But the question is who is the broker to stop you? If you are trading into stocks, that essentially means you carry the understanding of risk. Risk – big or small that’s a different story altogether.
Restricting the investment options, many a time takes away the probability of you making a winning move. You can just see some stock going up. But you would be helpless as your trading platform won’t allow buying that.
6. Ease & peace of mind
There is a huge investor population in India. Probably the largest percentage of investors which loves to trade with trading platforms owned by banks. For sure the first reason is the humongous trust that a banking institution brings across. But another most important factor with banking owned broker platforms is that they have an unmatched ease of trading. Technically you don’t even need to transfer funds by going to a banking platform, everything happens within the same login. Instead of funds transfer & withdrawal, you allocate funds and dis-allocate the remaining funds at the click of a button.
This ensures that your unused money remains in the bank account thereby you not losing any interest on funds. Most of the discount brokers assume the interest on the idle funds of clients as their earning. Your broker is earning your money & this is an indirect cost of your trading. Online Trading at banking owned broking platforms have a clear-cut unbeatable edge here over both discount brokerage platforms & normal broking platforms.
One thing that I have always felt that brokers are master in dishing out hidden fees and mysterious charges. They do so under skillful layers of attractive marketing and extremely complicated business jargons. Well, I am not saying that discount brokerage is always a disguise. Rather my point of view is that it requires a detailed and careful analysis. This will help to determine whether it is a true discount. And overall how is it going to reduce your costs of trading
Is it truly possible for a trader or investor to reduce costs per trade?
Yes, it is. No matter, whether you are with a Discount Broker or a full-service broker. You have the liberty of reducing your trading costs everywhere. But you will always need to consider hidden trading costs. Don’t be afraid to search for information. Ask for fine prints of every single tariff. Shop around and compare different brokers offerings or plans. And try to even play them off each other. When you put one against other, they themselves start telling you the hidden pricing of others. If someone is fair on that front.
A broker may be making you trade for brokerage and fees but you trade for one thing that is Profits. After all, profit is profit and the more money you make from trading the better it is for you. Don’t merely look at the brokerage, but gauge the Total Cost to Trade. Include all ancillary & hidden charges to arrive at the net cost and then see where you are being fooled. Lesser Costs means a bigger profit margin, that’s what is your reason to be doing stock trading.
Snapshot features of discount brokerage