Understanding Discount Brokers in India

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,ICICI Direct,HDFCsec,IndiaBulls)?

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

-IPO investments
-Stock buy and sell in cash market
-Bonds buy and sell
-Mutual funds buy and sell
-Annuities
-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
-RM
-offline and online trading
-PMS for stocks
-PMS for mutual funds
-Wealth management
-Commodities
-Private equity
-Investment advisory
-Trading calls for multiple market segments and different time frame – intraday, short term, long term
-Demat
-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
-SLB

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
-DMA
-Shared servers for co-location.
-Basic backoffice as per law
-ECN
-Call and trade
-Email support

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 ]

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Comments

  1. sauraj tripathi says

    Hi,

    Request you to please Add Commodity chart for Copper,Lead,Zinc,Aluminium,Nickel.

    Soyabean and chana have very less voulme…

    Regards.

  2. OSK says

    In my view these so called full service brokers are good for nothing. In fact, I consider them daylight robbers. This is based on my personal experience. They do come to our home for opening a/c. But if we are think they will give us best of their services and we will be able to generate profits with them. Then it is 1000% wrong. They are just bothered for their brokerage nothing else. They will give leverage for intra day trading with huge volumes (in options). But this is purely for their benefit. Once they come to know that, your pocket is about to become empty, then they start showing their real colours.

    Never ever think of going for these daylight robbes. Best thing is aquire requisite knowledge, have basic tools then have account with Discount broker and trade on our own.

    • says

      @OSK,

      It you want to trade on your own and looking for reducing your breakeven level then its better to stick with discount brokers. And if you are looking for multiple products like mutual funds, stock delivery, bonds then in that case full service brokers come into the picture. But for the trading sense your breakeven will increase dramatically with full brokers

  3. subhash says

    hello traders,

    i also disagree with the daylight robbers as full service offering brokers. dont lose money without knowing technical analysis basis knowledge. this information is my own experience. in the market first your side knowledge is the main thing. dont go for tips, brokers advices, etc., where the technical tools are to offered by free of service they are called as discount brokers. the give a chance to know the market basics and how to trade with TA setups. thats the right thing i also doing now. thank you reading for my comment .. do your best choise .. have a nice trader..

    • says

      @Subhash,

      The main aspect for brokers is get the people involved with the trades. And where many common people who are new to stock market sometimes get in trap of some wrong broker advises as these people mostly depend on their
      advises. Only mature traders in india are looking for discount brokers as most of the common people it takes some time to understand the brokerage structure and their breakeven margins.

  4. Sandew says

    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.

    Above is all what I was looking for. Who needs tips from brokers, anyway.

    In conclusion, discount brokers are equally good. They save you money.

  5. Harsh says

    First thing day trader with large volume never use the full service brokerage house bcoz they eat all your money . My experience with icici.direct is same but uncle kitchen always rock.
    thanks for good post.

  6. prabhjot says

    hi rajandran i want to know Are discount brokers company also take brokerage on penny stocks for eg if i buy 50000 shares of XYZ company at 0.10 paise than sharekhan type companies will make 5 paisa brokerage on each share .

  7. shankar says

    Hi there, very nice comment, I am trading with RKSV, I just wanted to know if I can confirm that my money is safe with this broker house, as I am planning to invest a huge amount into it. Can you please guide me as to how I can find out that it is really safe.

  8. Chintan says

    ARE THE BROKERAGE SAME FOR 0.10 Rs. stocks from discount brokers.
    i am looking for opening an A/c with smarttradeonline.
    can u share ur experience for which one to go with?
    Sir one think i whould like to know if for e.g. a broker goes bankrupt or unable to fulfill their daily cost so in that case what whould be our safety for both shares in CDSL and most importantly our amt or RS. which has been transferred for purchasing shares or for eg. sold shares worth Rs. 50 lkh now which is with Borker . IS THERE ANY SAFETY MEASURES TAKEN BY SEBI OR GOVT.
    Sir will like ur comments regarding this as i am new…

  9. guest says

    Article says -- “Max brokerage (by al type of l brokers) can not be higher than 2.5% (see sebi site for actual details) of trade value.”.
    That means the companies (ShareKhan, RelianceMoney etc.) that are charging minimum per share brokerage are violating that rule in case of penny stocks. In many case they would be charging you more than 100% brokerage. There are many shares that have got reduced down to 5 paise (some even went down to 2 paise) per share. If you are purchasing these penny stocks, you will be paying more than 100% brokerage (RelianceMoney charges even 7 paise/share for basic customers).

  10. Suresh says

    In my experience, if you are an investor with a view to hold a stock for a minimum of 1 or 2 or more years and sell with a 15-30% or more gain, then it would be okay to go with Full service brokers , as there as some benefits.
    But if you are a trader who knows a bit of technical analysis and if you do a single trade in 10 , 20 or more Lakhs , discount brokers is the best suitable. Image the saving, for NRI’s, the full time brokers charge 1% of the value of each buy or sell , so for a stock when you buy and sell, 2% of the total amount will disappear as brokerage , where as you have to give only Rs 40 ( 20+20) to a discount broker. Service and customer support is the same . But for NRI’s who wish to move to a discount broker, first check with your Bank if the discount brokers deals with them and get their go ahead .

  11. amit says

    Thank for your suggestions on broker. . Is it possible that broker like zerdha run away with my money in trading account

    • common man says

      first of all…it is zerodha….and they can not cause they don’t have option to withdrawal…if they do also..as per SEBI rule they can place a with drawl request only to the linked account which is yours …

  12. common man says

    when u have 5 rupees pocket es in your .and you didn’t have food for last 2 days…what do you except?or a place where you can get enough food to quench your hunger with a testy food right…and we i.e 80% of traders if we save 500 rupees per day,after doing all the need fulls..we will be very much happy…then what is your point to say that when I can save 90% of our brokerage as a NSE<BSE<MCX trader WITH DISCOUNT BROKERS…why are you trying to convince that can traditional brokers are better….Come-on You see the result or I can say revolution…by the decision of HSBC retail brooking and IIFL..sorry to ask that…how much do u get as a Authorized Person of a traditional broker?do not work for money sir…

  13. commodity sh says

    Dear
    What is ur opinion about wintrader.in. Today I saw thier website. They are offering 10x leaverage in intraday trading in mcx. Is it a scam? They are sebi registered broker?

  14. vikas says

    i think rksv nd zerodha will not run away with our money as they are sebi registered … second thing , all the big big brokers like angel , sharekhan etc etc gives us tips just bcoz of their profit …. no tips or no technical charge gives u any idea about intraday trading … its ur own research who gives u right ideas …

  15. Shree Punia says

    This is the most bullshit and Absurd comparison I have seen between two product offering firms.

    I personally have been traded using ICICI Direct, Reliance etc etc and likes as RKSV and ZERODHA, I find these low brokerage much better than these so called Biggies. They answer your call within 30 secods Guaranteed but you have to wait in these biggies.

    And there is huge huge price difference.

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