Basics of Stock Market 14: Discount broker, full-service broker and what are the brokerage charges
Let now see who are these brokers in the stock market. To know the process of buying and selling shares where brokers are involved, I recommend you read the article on Different accounts needed for trading.
Stockbrokers can be classified into 2 types: Discount broker and Full-Service broker. Choosing the right type of broker as per your trading style and requirements will help you get the most out of trading.
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Brokers
Now since everything is online, all trading of buying and selling shares is done online now. Hence, the benefits, advantages, and drawbacks are all connected with online trading. Brokerage firms are getting famous in India and the competition is also on the rise. The competitive pricing ultimately comes down to the amount of brokerage a broker takes while selling a share. You lower this, and the broker becomes more attractive. But for some, the added benefits which come with a broker are also the factor in choosing a good broker.
Discount brokerage service provides you with the basic tools you require to trade on the stock market, with minimal to no additional services. Full-service brokers offer additional services with the basic tools which become attractive to the person who doesn’t have time to do research about the market. Let’s look at the two types of brokers in India.
Full-Service Broker
A full-service brokerage firm offers guidance and advice on how to invest your money, how much to invest and where to invest. They also offer portfolio management services, which means a professional will be making sure your portfolio is frequently updated and trimmed accordingly. This trade-off is the increase in fees you pay, as you are essentially hiring someone to do the advisory and trading for you.
These brokers suggest quality stocks for their clients. The service and advisory which they provide are what the client pays for. Hence, they always look into a more qualitative approach than a quantitative approach.
Example: Geojit, Motilal Oswal
Discount Broker
A discount brokerage account is what you will opt for when you’re looking to learn the stock market by yourself and start your investing and trading career by learning and doing by yourself. Since you’re doing all the research and trading, these brokerage firms have very limited transaction fees, brokerage, and Annual Maintenance charges. This way, you can apply your learning and expertise to save some bucks on additional services.
These brokers usually look for a quantitative trade. Since the brokerage is less, brokers make their clients take a greater number of trades to gain profitable brokerages from traders. Taking a trade or not is always our choice, brokers don’t push for it, but the only way for discount brokers to be profitable is through a greater number of trades. Discount brokers look for quantitative trades rather than qualitative ones.
Brokerage and charges
When you sell a share, that is when all the brokerages and charges come into play. While buying a share, you will not be charged anything, only when you sell, the charges are subtracted from your overall profit or loss. Before learning about the charges, we need to understand what turnover means.
Turnover: If you're buying 500 qty of shares at 100, the total amount is 50,000. And when you sell your shares at 1 rupee profit at 101, your total capital will be 50,500. Now your overall turnover will be 50,000+50,500= 1,00,500. This turnover value often called transaction value is used in calculating the fees and charges while selling a share.
Now let’s look at some of the charges and fees levitated by brokers.
Brokerage
This is the amount of money the broker takes for their service. The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations and hence, it may differ across various exchanges. As per the BSE & NSE Bye-Laws, a broker cannot charge more than 2.5% of the transaction from his clients.
For discount brokers, the brokerage is 0.03%-0.05% of transaction value or 20 per trade, whichever is lower. For full-service brokers, the brokerage is 0.05%-2.5% of transaction value or min of 35 per trade to a max ceiling of 2.5%.
If you're buying 100 qty of reliance at ₹1300 and selling the same at ₹1310. The capital required for this is ₹65,000 to make the trade. The brokerage for a discount broker will be ₹40 while for a full-service broker will be ₹1305.
Securities transaction tax (STT)
Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time. STT is the tax paid to the Government of India when you buy or sell securities.
The STT is taken as 0.025% on the sell-side capital for intraday trades. The STT is taken at 0.1% on the transaction value for delivery trades.
Exchange transaction charges
Transaction charges are charged on both sides of trading by the stock exchanges. A transaction fee of 0.00325% of the total amount is charged by the National Stock Exchange, while a transaction fee charged by the Bombay Stock Exchange amounts to 0.00275% of the total amount.
GST
GST is a significant reform in the field of indirect taxes in our country. Multiple taxes levied and collected by the Centre and States would be replaced by one tax called Goods and Services Tax (GST). GST is a multi-stage value-added tax on the consumption of goods or services or both.
GST (Central and state GST) is levied as a percentage of the brokerage charged for the transaction. All transactions attract a GST of 18% (9% CGST and 9% SGST) of the value of brokerage and transaction costs.
SEBI turnover charges
The apex market regulator of the securities markets in India charges a fee on both sides of a trading transaction with a turnover charge of about 0.0002% of the total amount. The charges are the same for both intraday and delivery trading.
Stamp duty
This fee is levied on the value of transferred shares, and this rate differs across states as the states are in charge to set and collect stamp duty. It is charged on both the buying and selling sides, charged on the total turnover amount.
Depository account maintenance charge
If you’re an investor and are holding your shares for more than 2 business days and then selling your share, this is termed as taking delivery of the shares, or delivery trades. In this case, you will be entitled to pay this charge.
We have 2 depositories in India. Central depository securities limited (CDSL) and National Securities and Depository Limited (NSDL). They charge a fixed sum for keeping your transactions in an electronic form.
This charge is 25 rupee per month which is normally collected by the broker on an annualized basis. They charge 300 per year for depository maintenance charge.
DP charge
DP charges are the revenue source for depositories and their participants. DP charges are a flat transaction fee, irrespective of the quantity sold. DP charges are the revenue source for depositories and their participants.
A stockbroker needs to become a depository participant to provide a Demat account to clients. They need to pay a membership fee to NDSL or CDSL, with several other fixed costs along with advanced prepaid transaction charges. The brokers pass on these charges to their customers by an additional fee to reclaim these expenses.
This charge is normally 20 per Debit transaction. When a share is sold from a Demat account, then this charge comes into play.
Tax
Short-term capital gain tax: If your holding period is less than one year, you are entitled to give a tax of 15% of the profit you have earned.
Long-term capital term: If your holding period is more than one year, you entitled to give a tax of 10% of the profits earned, if your profits are over 1 Lakhs. The gains of up to Rs 1 lakh a year are made tax-exempt.
Business tax: If you're doing intra-day trading/ day trading. Then you are entitled to give the nominal business tax, which is 33% of the profits which you have earned.
Conclusion
You will have to choose your broker according to your style of trading and the time you have. If you are particularly into investing and have no time to do the research, the full-service broker can help you with advice on which stock to pick, how to invest, and manage your portfolio. If your intraday trader or have experience in the market, the discount broker might be the best apt for you.
Whichever broker it may be the skill you develop in your broking career is the factor that will determine your success in your trading career. For this, you need a lot of patience if you’re an investor and a lot of practice if you’re into trading.