Have your ever wondered why discount brokers(e.g Tradejini, Zerodha,Compositedge,RKSV,RK Global) are charging very less and cheap rokerage when compared to full service brokers like Sharekhan,ICICIDirect,HDFCsec,IndianBulls)?
Here is a interesting article take from Mr. Kanitkar’s Blog which gives you complete understanding about what differentiates full service brokers from discount brokers and how discount brokers are able to charge low brokerage fee when compared to higher brokerage full service brokers.
I have seen many people do not understand difference between full service and discount brokers. I have traded with both (ICICIDirect, Motilal Oswal, ANGEL Broking, INDIABULLS, RK Global) and (Tradejini,Zerodha). Discount brokerage is still evolving concept in India.
If you use a brokerage, it’s useful to understand the difference between full-service brokers and discount brokers. Think of it this way: When dining out, your choice of restaurants ranges from Uncle’s kitchen to Oberoi’s Amar Vilas (any 5 star) Both provide very tasty food.
At Uncle’s kitchen (any local brand), you have to do self service or waiter will take orders, you have to wait for waiter to come over. Waiter will not suggest good food for evening etc. He will either tell you what’s hot or cold and take order quickly.
Same guy will just deliver food and plates on table. He may give you pleasant smile or may not. He will expect you to eat fast, pay bill quickly and leave place so he can serve next customer. Uncle will charge Rs. 10-15 for cup of coffee and 5 for cut-in tea and 7 for full cup of tea.
At 5 star restaurant, you will be welcomed by some sweet sixteen young girl (selected by top officials). The captain will talk to you about evening (if you have foreigners, he may speak some welcome words in foreigner’s native language – see we expect FDI here ). Captain will give suggestions about food, help you select it, will take orders on latest ipad. If you do not like one of dishes (which he suggested) he will not charge you for that dish as well.
Even if you order just one cup of coffee (he will not offer cup of tea as it’s not there in menu card), he will not disturb you for next 3 hours. You will endup paying Rs. 350 for coffee and 150 for some taxes and 200 Rs. for tip, total= 700/-.
Uncle always say his kitchen is best in town. Does Uncle lie? No, as he is serving different market segment. People do not expect him to hire sweet sixteen and have Captain for service.
Full-service brokerages offer following
-Stock buy and sell in cash market
-Bonds buy and sell
-Mutual funds buy and sell
-Insurance (health, life, term, investment)
-National Saving Certificates, Kisan certificates
-Margin funding for IPO
-Margin funding for stock trading
-Margin funding for FNO
-Loan against gold (under different name)
-Loan against stocks
-Research reports on fundamentals
-Research reports on technicals
-offline and online trading
-PMS for stocks
-PMS for mutual funds
-Trading calls for multiple market segments and different time frame – intraday, short term, long term
-ECN, good backoffice and software to manage assets
-Call and trade
-Funds transfer from almost all banks
-Facility to trade in all exchanges in India
-Facility to trade in all major global exchanges
-Forex trading in local and international markets
Full service brokerage firms offer multiple products to cater different market segments. Full service brokers will have some subbroker near to your house. Discount broker may have only one office in India.
Let’s talk about discount brokerage
Discount brokerage firms in India mainly offers
-High speed trading terminal
-High speed order execution systems
-Shared servers for co-location.
-Basic backoffice as per law
-Call and trade
They expect do-it-yourself investor/ traders. They will not spend time on educating investors like full service one (see Uncle’s waiter and Captain in 5 star). They do not offer own DMAT service.
Full service brokers will have RM coming to your office / home to open your account. Discount brokers may not do that.
Both provide equal level of security for investor’s money in accounts as brokerage is highly regulated business. Both are at par in eyes of Sebi or stock exchanges like NSE, BSE. It’s not like discount broker will run away with your money and full service one will not. Money is equally safe with both.
Discount broker charges much less fees as against full service. Max brokerage (by al type of l brokers) can not be higher than 2.5% (see sebi site for actual details) of trade value.
If you buy Merc, your dealer giving 2 weeks training to your driver about how to drive Merc. Merc provides free pick up for your vehicle (any where in India even if your Merc is far remote area in India) to workshop. Merc service manager gives regular calls to customer on regular frequency asking about how car is doing. Merc customers are not expected to ask for why servicing charges are so high.
But, if you buy Nano or Maruti and say “you know what Merc dealer do so much and this non sense Nano/ Maruti dealer is hopeless etc”. Does this makes sense?
As people do not expect owner of Uncle’s kitchen to hire sweet sixteen and have Captain for service. People should not expect discount brokers to offer services of full service brokers at rate of discount broker’s brokerage.
[Source : Kanitkar's Blog ]