Traditionally share trading brokerage (charges or fees) is charged on percentage of value of the trade (i.e. ICICI Direct charges 0.55% in cash delivery segment). These brokers are also known as 'full-service brokers' or 'traditional brokers'.
There are few challenges with these brokers as they are expensive, the brokerage with them goes high with the size of trade, client has to do lot of calculations to find out the cost of the share and a minimum brokerage charged (i.e. ICICIDirect charges minimum Rs 25 per trader) makes the trading in penny stocks almost impossible.
With the technology used in trading has changed significantly in recent years and online trading become a norm, a new category of brokers known as 'Flat Fee Stock Brokers' or 'Discount Brokers' has flourished and took away a major chunk of trading volume from the traditional brokers in last few years.
Flat fee stock trading is a much simplified and cheaper option available to traders today. The flat fee share dealing is already become very popular in developed countries (company's like E-Trade, Sharebuilder, Fidelity, Charles Schwab, and TD Ameritrade) and finally making its way in to India's Stock and Commodity Trading market.
Flat Fee Stock Trading brokers (also known as discount brokers) charges a fixed amount (i.e. Rs 20 or Rs 25) per trade irrespective to the size of the trade. The trader pays fixed price brokerage, say Rs 20, for trade of Rs 100 or Rs 1,00,000.
When you buy 500 share of XYZ Ltd at Rs 0.15 per share, the brokerage charged by Fixed Price Broker will be Rs 20; while the traditional broker will charge minimum of Rs 25.
When you buy 500 share of ABC Ltd at Rs 750 per share, the brokerage charged by Fixed Price Broker will still be Rs 20; while the traditional broker will charge Rs 1875 (at the rate of 0.50%).
The above example clearly show that the brokerage charged in flat fee share dealing is significantly low and simple.
Why I should move to Flat Fee Stock Trading Broker?
There are multiple advantages of moving to a Flat Fee Stock Trading Broker. Some of them are discussed as below:
- If you are an active trader and don't need or want advice, research, recommendations or any other services, this is probably the broker type you should choose.
- They can save above 90% brokerage on most of your trades. No additional fees, just one low, all-inclusive rate. They are more affordable to average investors. With the saving of this size, you can trade more.
- It makes the calculation of brokerage really simple. Once you know the number of trades you did, you can simply multiply it with the fixed brokerage and find out the total brokerage bill you have to pay (excluding taxes).
- They are focused only on brokerage services and provide better customer services.
- There are no hidden charges. They do not charge for software uses.
- Taxes charged on brokerage (i.e. Service Tax of 12% on brokerage) are less as brokerage itself is less.
- The trading platforms provided are industry standard.
What Flat Fee Share Trading Brokers do not provide?
They are mostly no-frill brokers and do not provide many services which traditional share brokers provide including personal advices, research reports, recommendations, 3-in-1 accounts (bank + demat + trading account), branches in every city etc.
Online account statements, trade conformations, bills, payments etc are available for free. But additional services like call and trade, paper statements etc are charged extra. This is quite similar to the traditional brokers who also have additional charges for add-on services.
The flat-fee brokers also may not provide all the investment options a full-service broker may provide. For example Zerodha doesn't provide option to invest in IPO's.
In person visits to branch offices is not possible with almost all discount brokers. As said earlier, to reduce the cost, they keep limited number of branches in metro cities only.
Customer service of the flat fee brokers may not be as good as other big traditional brokers. The customer services representative may are not available 24*7 to answer your questons. Very few discount brokers provide customer services on late evening or on Saturdays and Sundays.
In our discussion with the management of these brokers, most of these brokers are now planning for 24*7 customer service.
Which stock or Commodity exchange can I trade?
The flat fee stock trading brokers are same as traditional brokers. They are registered with SEBI and multiple stock exchanges. They provide trading facility in almost all popular stock and commodity exchanges in India including BSE, NSE, MCX etc.
They also provide services across all the segments of equity and commodity trading including Intraday Cash, Delivery Cash, Futures and Options Trading.
Trading with discount brokers is as safe as trading with any other rational broker as they are registered with or govern by the same bodies (SEBI and Stock Exchanges).
How Flat Fee Stock Trading Broker's make money with such a low brokerage?
They are discount brokers who run on volume based business model. Their main objective is to increase the volume of trades and thus make more money.
When the trade is cheaper, the trader executes more trades and thus the broker makes more money.
Also their operational cost is very low as they provide no-frill broker services. They leverage technology to keep the cost low. They do not spend money on managing branches in every city and team of researchers who provides daily recommendations. Their spending on advertizing is also less as they work on referral model to promote their services.
By keep the cost low and trade volume high, they can make more money than traditional brokers. The simplicity in the business model makes them very attractive to the traders.
What parameters should I look at before choosing a Flat Fee Stock Broker?
Each investor is unique and has different requirements. Following are few key parameters which can help a trader in choosing a broker:
- Brokerage Fees and other charges
You should carefully look at the fixed price brokerage as well as additional services charges of each of the brokers. Do not make your decision only on the fixed brokerage amount.
For example: Zerodha charges Rs 20 per trade and Composite Investment charges Rs 25 per trade. But Composite Investment 'Transaction/Turnover charges' are Rs 450/crore on Equity Futures and Rs 375/crore on Currency Futures while for Zerodha Transaction charges are Rs 490/crore on Equity Futures and Rs 440/crore on Currency Futures.
Brokers may require a minimum balance. It is worth checking about this in advance.
- Available Investment Options with the Broker
Unlike tradition full-service brokers, the discount brokers do not provide wide range of investment options (i.e. stock, commodity, currency, IPOs, FD's, Mutual Funds etc.). You should carefully look at the investment options available.
For Example: Zeordha doesn't provide share trading at BSE, option to invest in IPOs and Mobile trading platform.
- 24*7 Customer Service
It is important to know the timings of customer service representatives availability on phone or online though chat.
- Ask for a demo of trading platforms and back office software
Before you open the account, make sure to ask for a demo of the trading platform you will be using. It is important to check if your computer is compatible and your internet connection is good enough. The interface, usability and security of the online trading account and trading software's should be check before opening the account.
Who are top Flat Fee Stock Trading Broker in India?
Zerodha, The Free Trade Zone
A Bangalore based Flat Fee Share Trading Broker who charges Rs 20 per trader. Zerodha was the first company to introduce this brokerage model in India in June 2010. Click here to know more about Zeordha.
RKSV Securities – The Dream Plan (Flat Rs 20 Per Trade)
RKSV is a Mumbai based popular discount broker. RKSV offers both unlimited trading plans and flat Rs 20 per trade brokerage plan across segments at NSE, BSE and MCX. RKSV's Dream Plan offers trading at flat Rs 20 flat irrespective to the size of the trade or number of lots in a trade, with the first 5 trades free, each month, for life. Click here to know more about RKSV Securities.
Composite Investments (Compositedge), It makes sense
Composite Investment is a Bangalore based broker since 1995. Composite Investment started the Flat Fee Share Trading service in April 2012 though its portal Compositedge.com. Compositedge charges Rs 25 per trader. Click here to know more about Compositedge.
Choosing the right broker mainly depend on your investing patterns and need for services and advice. The trader should consider multiple options before choosing the broker. While Flat Fee Share Brokers are cheaper options, they may not provide research, recommendations and the level of personal services which you may be getting from your traditional broker.