 "Choose a discount brokerage if you don't need advice")
Recent developments in stock broking can be confusing for direct equity investors, especially those looking to open a fresh trading account. Discount brokerage Zerodha recently announced it would not charge any fee from clients for delivery-based transactions. Their brokerage for intra-day and futures and options (F&O) is a maximum of Rs 20 for each trade.
Sanjeev Seth, a software professional, finds the offer tempting but isn't sure if it suits his needs. "I am not sure if sacrificing facilities such as research calls or trade on phone for a zero brokerage fee is worth it," he says.
For every Rs 10,000 worth of trade, Seth will need to pay around Rs 12 in various charges, excluding brokerage. Assume he needs to pay a brokerage of 0.2 per cent on each trade; he will incur an additional cost of Rs 20. If he makes around 20 transactions a month or an average of one a day when markets are functioning, the total monthly brokerage cost will come to Rs 400. For an investor who wants to build a portfolio for a long term, this isn't much. However, for those into intra-day and F&O, a flat brokerage fee of Rs 20 or less can make a huge difference.
Yet, the fee shouldn't be the first criterion of evaluation when a person is choosing a broker. Full-service and discount brokers both have their benefits. The investor or trader first needs to understand his or her requirements before enrolling and select based on the parameters discussed below.
Research and advice
Key factor distinguishing the full-service brokers from those offering a discounted fee is research. If a person is looking for research reports on companies and sectors or trading calls in F&O, it is betterto opt for a full-service broker.
Nikhil Kamath, director at Zerodha, says discount brokerages suit do-it-yourself type of investors or traders, not looking for advice. A little over 80 per cent of business for discount brokerages, therefore, comes from clients who trade in intra-day and F&O. These are experienced investors. "Many of our clients either trade for a living or plan to do it at some time in the future," says Kamath.
Delivery-based investors usually buy after going through research reports or expert advice. Prasanth Prabhakaran, head of retail broking at IIFL, says such investors do not have the time and wherewithal to analyse businesses on their own. They should opt for a broker with a strong research team, comprising at least 40-50 members and across different segments, to help investors take an informed decision.
Ajay Menon, director and operations head at Motilal Oswal Securities, says full-service brokers also have human intervention at each step. "When people put their hard-earned money in stocks, they want a person answering their queries and servicing their requests." Those seeking services like call and trade and interacting with a relationship manager for opinion on stocks or any other queries should opt for full-service brokerage. To keep costs low, a discount brokerage does not offer a facility like a dedicated relationship manager or placing of orders on the phone.
Tech-savvy
Discount brokerages work the best for people who are 'tech-savvy', says Vikas Singhania, executive director at Trade Smart Online. These brokers also offer algorithm-based trading, mostly F&O trading strategies based on technical analysis, which need to be coded in the trading platform. Not all discount brokers have in-house teams that can write software codes for clients based on the strategy they choose. Such things require better understanding of technology. That's why most clients with discount brokers are in the age group of 20 to 45 years, with heavy concentration on those between 27 and 35.
Kamath says apart from research, technology is another key differentiator between the discount brokers and full-service ones. As the former leverage technology, their programmes are speedier and also have a low hardware cost, while being scalable. Kamath claims their charting, too, is superior to most full-service brokers. Zerodha also offers insights on the trading behaviour of client. Their software analyses provides information to clients such as the day of the week when they are most profitable, strategies that earned the highest profit, whether they made more money going long or short and so on. Customers need to be tech-savvy to use such data to their advantage.
If a customer is looking for an algo trade with a full-service broker, they can sit with the executive to understand the trading strategies, get help to choose the best, based on the risk-reward ratio, and get it developed within 15 days.
While discount brokers offer leverage off intra-day, none have a margin funding facility at present, as it comes with additional costs to the provider. Only Zerodha is planning to offer it in the future. Full-service brokers usually have non-banking financial companies (NBFCs) that provide the facility.
Full-service entities feel with discount brokers coming into the market, the business is commoditised. As discount brokers evolve, they are lowering costs, while introducing better tools for investors/traders by using technology. Full- service brokers have been diversifying business to reduce their dependence on revenues from broking alone. Rahul Jain, head of retail advisory at Edelweiss Capital, says the future for full-service brokers is to be a one-stop financial service company that can help a client at every stage in his or her life. Most of the big brokers now have all financial services under one roof. They have wealth management and portfolio management services, an NBFC that offers all types of loans, insurance, and even a mutual fund business. "The idea is to help clients with their entire financial planning at each life stage and offer any solution they wish for," says Menon of Motilal Oswal.
MAKE YOUR CHOICE
DISCOUNT BROKERAGE
- Offers low cost
- If you prefer do-it-yourself model
- If you are into futures and options and/or intra-day trades
- Offers better technology
- Offers standardised plans
- Offers intraday margin funding
- Offers research and advice
- Has relationship and fund managers
- Offers call and trade facility
- Offers high branch network
- Has wider product offering
- Offers carry forward margins
