Discount brokers - A detailed overview

Published on Tuesday, April 28, 2020 by Chittorgarh.com Team

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Discount brokers - A detailed overview

A synopsis

India is now officially in a bear market, and on a price-to-book value basis, valuations are at 8-year lows, approximately the same levels as those witnessed in 2008. So, while on one hand, the average man is shying away from the stock market, there are those - both investors and fund managers - who want to make the best of these price levels and invest now. In this backdrop, the decision to nullify or greatly reduce brokerage charges could well be a game-changer for both discount brokers and investors.

The starting point

Following the inception of discount brokers in India, the country's broking industry witnessed a massive upsurge, with the formation of many more brokers in this category. This also prompted a number of traditional brokers to lower their brokerage charges.

Looking at the numbers

A discount broker's business model includes a flat brokerage rate for every trade executed by their clients - usually between ₹10 or ₹20 per trade - irrespective of the size of the trade. Full-service brokers' clients, on the other hand, have to pay a fraction of the fee charged on the entire transaction volume, so the brokerage charged increases with the size of the transaction. This could be as high as 0.3% to 0.7% of the transaction volume. As an example, let us take the case of a lady - Mrs X, who buys shares worth ₹100 and another man - Mr Y - who purchases shares worth ₹200. Let us say that the discount broker they go to - ABC Ltd - charges a flat rate of ₹10 per executed order. Therefore, both Mrs X and Mr Y pay the same brokerage of ₹10 for two different sized orders. On the other hand, if both of them go to a traditional broker whose commission is 0.5% of the transaction value, the brokerage paid by both these parties will differ. It will result in Mrs X paying 50 paise and Mr Y ₹1 as brokerage charges.

Wide scope

Though the broking community was earlier largely confined to the higher echelons of society as they could well afford the charges, the rise of discount brokers has enabled individuals with a smaller capital base to participate in the stock market. This is largely owing to their lower fee structure. However, this category of brokers largely does not offer investment advice or undertake research for their clients, unlike full-service brokers.

State-of-the-art technology

Broadly, most discount brokers are equipped with and offer the same trading platforms i.e., NSE NOW or NEST Trader. However, a few have taken the initiative to develop and use in-house trading platforms. Examples of these are mastertrust platform MasterSwift, Zerodha's Kite, FYERS' FYERS One and FYERS Markets, and RKSV's Upstox.

Comparison of five leading discount brokers in India

Here is a snapshot of five leading discount brokers in India with their key features:

Name

Inception year

Pricing/Charges

Features

Software

mastertrust

1994

· Charges for opening a trading a/c depends on the choice of brokerage scheme

· Charges for every order executed: ₹20 (20:20 plan)

· AMC Charges: ₹300 (20:20 plan)

1. Deals in the equity and derivatives market through BSE and NSE, and the currency market through MCX-SX

2. Provides commodity trading on MCX and NCDEX

3. Highlights of the 20:20 plan:

· Ideal for new investors

· Charges for every executed order: ₹20

· Advanced charting using ChartIQ

· Free web and mobile trades for the first three months

· Call and trade facility

· Fifth order is free

masterswift v.2.0

Zerodha

2010

· Charges for opening a trading account: ₹200

· Charges for every order executed: 0.03% of turnover or ₹20, whichever is lower

· AMC Charges: ₹300

1. Trading and investment: Equity, derivatives, currencies, mutual funds and commodities

2. Pulse: News blog

3. IPO online application facility

Zerodha Pi

Angel Broking

1987

· Charges for opening a trading account: Zero

· Charges for delivery orders: Zero

· AMC Charges - ₹450 + Tax

1. Trading and investment: Equity, currency, commodities, F&O

2. Account opening: Demat and trading

3. Stock advisory: Advice/recommendations with research reports

Angel SpeedPro

5Paisa

2016

· Charges for opening a trading account: Zero

· Charges per executed order: ₹20

· AMC Charges - ₹540

1. Trading and investment: Equity, currency, commodity, mutual funds, insurance and personal loans

2. Stocks, mutual funds and insurance available on a single platform

3. Advanced advisory tools, with features like charts and customised watchlists

5Paisa TradeStation

Fyers

2015

· Charges for opening a trading account: ₹400

· Charges per delivery order: Zero

· AMC Charges - ₹300

1. Trading and investment: Equity, cash, F&O and currency derivatives segments

2. Advanced charts, real-time screeners and analytics

3. Thematic investment platforms for investing in the latest themes

Fyers One

As can be seen, the popularity of discount brokers has greatly increased over the last few years with the advancement of technology and the lure of both low brokerage costs and a speedy platform for trading in a number of asset classes. The prevailing conditions in the economy and markets are expected to be conducive for this industry.

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