InvestorQ : What are some of the unique advantages that discount broking brings for investors in India and are these really long term advantages?
Sam Eswaran made post

What are some of the unique advantages that discount broking brings for investors in India and are these really long term advantages?

swati Bakhda answered.
3 years ago

Before getting into the proposition that discount broking offers, let us just spend a few minutes on why it has taken off only in the last few years, perhaps after 2010. Low cost brokerage is nothing new and has been around for a long time. But 3 factors actually conspired to make a success out of discount broking.

· With more liquidity flowing into markets, most financial markets became volatile. Hence, returns became hard to sustain. Costs started pinching and investors saw merit in lowering costs.

· Discount broking cannot really work in an offline scenario. The proliferation of internet, higher bandwidth and smart phones gave an indirect boost to discount broking. Now anyone could trade at any time sitting virtually anywhere.

· An important aspect of discount broking is its do it yourself (DIY) model. As a large chunk of the millennial tech savvy population entered the job market and started earning, they preferred such DIY tools to enable them to understand and trade markets. Discount broking made sense.

Let us now turn to some of the clear advantages that discount brokers offer to clients

If you were to look at it analytically, there are five broad propositions that discount broking actually offers. These are the distinct advantages of discount broking.

· Discount broking is about costs. For example, if you go to a full-service broker, you pay brokerage of 0.6% to 1% on one side of the trade for a cash market delivery transaction. The statutory costs are on top of that and so the one-side cost adds up to nearly 1.5%. When you subsequently close out the trade it is another 1.5%. On a total round cost of 3%, you are already starting at a disadvantage. Most discount brokers charge 0% brokerage on cash market trades and hence break even suddenly becomes a lot more interesting.

· Discount broking starts you off with a nearly 2% cost advantage for delivery trades. That means; your breakeven comes in much faster than when you are trading with a full service broker. You will agree that 2% is a big difference in returns.

· In intraday trading or in F&O, the average cost is 0.01% on each side or lower. When you compare the cost with a full service brokerage, your breakeven can kick in much quicker. In leveraged trades like intraday and F&O, low cost helps you churn capital faster and leverage does not really hurt.

· Discount brokers have top-quality technology platforms. When it comes to discount broking, the need for speed and access is paramount. Discount brokers offer speed and anywhere access at a very reasonable cost. So no more worrying about getting across to your favourite dealer.

· One can always argue that full service brokers do offer additional research and advisory services. For a trader or an investor, it is best not to mix execution with advice. In fact, execution and advice coming from the same source is conflict of interest. Low cost brokers give you the tools to screen stocks and traders are free to seek outside professional advice. Even if you add up that cost of outside advice, you will start better off.

It does look like discount broking is an idea whose time has come. Not surprisingly, Indian discount brokers are making the most of it.