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Over the last few years there have been a plethora of discount brokers who have come up across India. These discount brokers are largely structured on the global Charles Schwab model. The Schwab model is based on very low cost of trading and virtually no research or value added services. The discount broker essentially provides you a platform on the internet to trade shares as well as futures & options at very low rates of brokerage. Of course, the STT on the value of the transaction will continue at the extant rates since that is a statutory cost. First, let us understand how discount brokers differ from full service brokers.

Contrasting discount brokers from full-service brokers:

There are some fundamental differences between these two categories of brokers. For example, discount brokers do not operate through franchises or branches but purely leverage the power of the net. In fact, most of the discount brokers prefer to also offer a downloadable app on Android and IOS so that people can even trade on the go using their mobiles or notepads. Secondly, while a typical full-service brokerage would charge 03%-0.5% as brokerage on a delivery trade, the discount brokerage would even go down to a fixed rate of brokerage of Rs.10 per trade or Rs.15 per trade just to enhance the customer’s trading activity. Full service brokerage is suitable for investors who are looking at hand-holding, continuous advice and research support and also ease of offline transactions. Discount brokers do not offer any of these services except call ‘n trade facility more as an adjunct to their online trading platforms. While full-service brokerage will give you funding support, discount brokerage will allow normal trading leverage but that too will be machine driven and hence dependent on strict risk management.

How do discount brokers charge and make money?

Most discount brokers charge on a per trade basis in case of cash equities and on a per lot basis in case of F&O trades. The low brokerage induces the clients to trade more aggressively and the lower rate is compensated by the frequency of trading by the client. Since discount broking is centrally manned and relies more on machines to do the RMS, the low cost works to their benefit. Also, discount brokers do not require add-on support in the form of advisors, traders and analysts and thus the cost of trading comes down substantially. There are hidden charges you need to be wary of. For example there are some discount brokers who charge more for intraday and less on delivery so that as traders churn more, they actually earn more brokerage. Very importantly, the discount brokers work on net positive funding basis. Since, the trades have to be pre-funded by the client; the broker is always on positive float. That is the biggest reason that discount brokers still make money.

The truth actually lies somewhere in between:

The distinction between full-service brokers and discount brokers is actually not so straight forward. Even full-service brokers offer a low cost model to their premium and high turnover clients. It is just that the larger mass of infrequent traders still pay a higher brokerage which takes care. The moral of the story is that discount broking in India is here to stay. Customers have to choose what best suits them. The truth probably lies somewhere in between!

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