Reduce your trading costs with discount brokers

Lower brokerage fee and speedy execution of trades are reasons why you should use these services

Milan Dhanale, 33, a Thane-based lawyer, is on to his fifth broker now. “When I started investing eight years ago, brokerage rates were very high. So, each time a broker offered me a better rate, I shifted,” he says. Dhanale now has a trading account with Delhi-based SAS Online, which charges him Rs 9 per trade, irrespective of lot size. It is investors like Dhanale, keen to pare their trading costs, who are driving the shift from traditional full-service brokers towards discount brokers. Owing to this shift, discount brokers like Bengaluru-based Zerodha have seen their client base double over the past year to 119,000 (as per December data from National Stock Exchange).

 
Cost and tech advantage
 
A full-service broker will charge you a brokerage fee that is a percentage of the turnover. The brokerage fee can be quite high if your lot size per trade is large or if you trade frequently. On the other hand, a discount broker like Zerodha charges a flat fee of Rs 20 per trade, irrespective of the lot size. “Whether you buy 10 shares or 1,000 shares per trade, they will charge you only Rs 20. This makes a big difference to traders,” says Chennai-based Rajesh Ganesh, 41, a former software industry professional who now writes alogorithms based on which he trades in options.

 

Since traders in the futures and options (F&O) segment carry out leveraged trades, their turnover, and hence brokerage fee, tends to be very high in the full-service broker’s fee model. Consider one example. Suppose a trader puts in Rs 1 lakh of his own capital for trading. That can give him leverage of six times for intraday trading, which would allow him to trade for as much as Rs 6 lakh. An average trader could buy a couple of times and sell a couple of times, which means that his turnover in a day could be around Rs 24 lakh. A full-service broker could charge an average customer 0.03 per cent of his turnover. At this rate, his brokerage fee would amount to Rs 720 in a day. For a more frequent trader the daily brokerage charge could be even higher.

 
When compared with the Rs 999 per month unlimited trading offer from SAS Online the amount of saving that traders stand to make becomes obvious. “The big positive about having a low brokerage fee in the F&O segment is that your breakeven point on each trade reduces. You can sell even after the market moves slightly and still make money,” says Dhanale.
 
Technology and speed of the platform are other selling propositions that discount brokers offer. “Lower cost was the initial differentiating factor that led to investors moving to discount brokers.

This has been followed by technological innovation and ease of trading, which the younger, tech-savvy investor appreciates,” says Nikhil Kamath, co-founder and head of trading, Zerodha. This broking house offers a web-based platform called Kite. “This platform executes trades very fast,” says Ganesh.

 
Speed of execution is crucial for traders. “Suppose I execute a trade at market price. If it doesn’t get executed fast and the market moves against me by even a couple of points, I could be set back by a few thousand rupees if my transaction value is high,” he adds.
 
To some extent, the shift away from full-service brokers towards discount brokers is also driven by disillusionment with some of the practices followed by the former. Since their brokerage fee is turnover-based, their relationship managers sometimes encourage investors to trade frequently based on tips for the day, which, more often than not, leads to losses for customers. In this context, the fact that discount brokers don’t offer any advice is seen as a positive, especially by investors who like to do their own research. “Our proposition is that we don’t know how the market will move. We just offer you an efficient platform at low cost with good service backup,” says Siddhant Jain, chief operating officer and co-founder, SAS Online.

 
Who should stick to full-service brokers?
 
For some buyers, however, it still makes sense to stick to full-service brokers, despite their higher costs. Fundamental-based investors in equities, who tend to buy and hold their investments, are one such category. “The research reports that brokerages send out and the regular teleconferences they organise for investors can be quite valuable,” says Bengaluru-based S G Rajasekharan, who teaches Wealth Management at Christ University and is an avid equity investor. The trick, say experts, is to mine these research reports for the information they provide, but take your own calls regarding when to buy and sell.

 
Customers who need advice and hand-holding too can benefit from full-service brokers. “We offer model portfolios meant for the long term which customers can emulate. Our advisors ensure that what customers hold is aligned to their risk profile and investment horizon. We also carry out periodic reviews and restructuring of customers’ portfolios,” says Arun Chaudhry, vice president and head-online business and product development, Motilal Oswal Securities.
 
Full-service brokers also offer a wider product range. “We offer mutual funds, non-convertible debentures and other bonds, portfolio management service and alternative investment funds,” says Arindam Chanda, head, retail broking, IIFL. Many of them also offer comprehensive financial advice across product categories.

 
Nowadays, if you are a high-volume trader, even traditional brokers will offer you lower rates, though they may not match those of discount brokers.

Broker Checklist  
 
·         Look for word-of-mouth recommendation from fellow investors
 
·         Go for a broker known to charge the correct brokerage (revealed by checking contract note)
 
·         Look for one who resolves queries and problems fast
 
·         Should offer real time support via email, chat and phone
 
·         There should not be any delay in pay-out
 
·         Should offer a robust web, mobile and desktop-based trading platform
 

·         Should have provision for quick transfer of funds from bank account to trading account
 
·         Charting software should be integrated into trading software (for technical analysts)
 
·         Check NSE website for number of complaints against the broker
 
·         Check if your broker has sustained massive losses in proprietary trading