InvestorQ : What is meant by discount broking in India? My worry is that discount brokers may cut corners and sacrifice on basic spending to keep costs low?
Juvina Maggie made post

What is meant by discount broking in India? My worry is that discount brokers may cut corners and sacrifice on basic spending to keep costs low?

Angel dcosta answered.
3 years ago

Discount brokerage is not zero brokerage but there is a cost to it, although it is much lower. It is like a no-frill airline. They don’t compromise on safety of passengers. They just reduce the frills like business class, food on board etc. Discount broking model was first launched in the US with the likes of E-Trade and Ameritrade. In the last few years, this model has picked up smartly and this growth has coincided with markets become more volatile and technology becoming more accessible. To answer your query, let me address five common myths about discount broking and at the end of it you will be clear about what discount broking is all about.

Are the zero broking business models trustworthy?

Well, these are time testes models and have run successfully in India and in other countries. Zero brokerage models are also run by SEBI registered brokers and they also go through the same stringent tests of capital requirements, risk management, qualifications of employees etc. The zero brokerage models save cost by not providing research or other forms of advisory services. Also, zero brokerage models are predominantly online models and save the costs of having too many branches / franchisees etc. These cost savings are then passed on to the trading customer. So, you can absolutely trust a discount broker just as you trust any other broker.

Is it possible for a broker to not charge any brokerage from the customer?

They do charge. It is popular myth that discount broker don’t charge anything to any customer. In the case of most brokers, the brokerage on cash market transactions is zero but trades in stock futures, index futures and commodity future are subjected to brokerage. Brokers even charge for intraday transactions. Often discount brokers charge brokerage on F&O transactions and not on cash market transactions. Despite zero brokerage the statutory costs will remain. Considering the cost management and the revenues, it is possible for discount brokers to actually be profitable.

Do I need to really worry about brokerage costs in stock markets?

If you are an occasional investor, then perhaps not! But, if you are a regular trader then you would know that brokerage costs matter a lot. For such aggressive traders, the cost savings from discount brokers can make a very big difference. That explains why there has been such a big shift of clients from full service brokers to discount brokers. For example, even if you save 20 basis points (0.20%) on cash market transactions then on a monthly turnover of Rs.2 crore, you save Rs.40,000. That is big enough.

Do discount brokers load hidden charges?

They don’t need to. Cost structure is there in front of you. Of course, you don’t get research reports, analytical front end, advisory services etc. Discount brokers cannot afford to spend on such add-ons. The lower brokerage that the discount broker is able to offer is due to the lower expenses that they incur. Discount brokers offer pure and efficient execution of transactions and don’t offer research or advisory of any kind. This saves huge research costs. Also, discount brokers do not invest in branches and franchisee expansion. The model is online / app based model and delivered through the internet and the mobile. Lower costs are passed on as lower brokerage costs to the customer.

Are discount brokers popular in India?

The largest broker in India today in terms of number of active customers is a discount broker. The interest first came from proprietary traders who needed to save on costs. Gradually, this has been spreading to retail customers who prefer to pay lower brokerage and trade on their own. This is called “Do it Yourself” investing or DIY investing and it is catching on. It will only sharpen in the coming years.