Discount broking or no-frills broking is all about execution about orders at the lowest cost possible. Normally, brokers charge customers for the execution plus the research plus any advisory support that they provide. In addition, brokers also used to provide the benefit of proximity by bringing the broker close to the customer through branches and franchise offices. A lot of this old model changed with the arrival of discount broking. The discount broker offered a strictly online model with no frills like research, advisory etc. These lower costs were passed on to the customers who benefitted from the lower tariffs and the higher effective returns.
Cost of trading and cost of execution makes a big difference to the returns that customers can earn. For example, in 2016, Warren Buffett had lauded the performance of Vanguard because it had saved trillions of dollars for customers through low fee index funds. One can extend a similar logic to trading too. By lowering the cost of trading in equity, futures, options and commodities, discount broking changes the economics and gives you more chances of being profitable.
How stock traders can benefit from discount broking
- Discount broking is a no-frill approach that only charges for the execution of the trade. Typically, the discount broker will charge you zero brokerage for cash market transactions but they will charge you higher brokerage for intraday, futures and options trading. Whereas, Tradeplus charges just flat brokerage of Rs.99/– per month for equity options, commodity and currency derivatives.
- Discount broking separates execution from research and advisory. Normally, pricing of broking services is quite opaque because the trader does not get to know how much they are paying for execution and how much for the research and support services. Discount broking makes a clear distinction. You only pay for the execution platform and the rest you take care of yourself. The trader is therefore in a position to decide whether they require research at all, whether they want to trade on their own research or rely on research of outside professionals. The lines are clearly drawn.
- The discount broking model substantially brings down the cost for the regular and aggressive traders. For example, for a trader who does a monthly cash market volume of Rs.2 crore, a saving of 20 basis points in brokerage costs, leads to a reduction of costs to the tune of nearly Rs.40,000 per month. This is good enough to literally fund the operation of a medium sized trading outfit in India. Also when you are trading aggressively, it is essential to bring down the cost so that you can churn the capital more effectively.
- For a trader, the discount broking model substantially enhances the return on investment. For example, if a trader earns a profit of Rs.50,000 on a capital base of Rs.10 lakhs in one month, that translates into an ROI of 5%. If you consider the reduced brokerage of 20 bps under discount broking, the actual ROI goes up to 9% per month. That is a huge difference to the economics of trading and the risk that the trader can take.
- Discount broking would substantially change the economics of the loss making traders. For example, traders in our above example making up to 4% losses currently will end up making profits. That substantially enhances the risk appetite of such traders and allows them to churn their capital more aggressively in the quest of returns.
- Lastly, the discount broking model substantially compresses the breakeven point of most trades. Remember, while the discount broking model saves you the brokerage and the GST, other charges like STT, Turnover Tax, Exchange Charges and Stamp Duty still remain as they are charged on turnover and not on brokerage. Thus even in discount broking there will still be a cost you incur. Suppose you save and end up paying 30 bps instead of 50 bps. How does it make a difference to the break even of TCS which quotes at Rs.2500. At a cost of 50 bps, the stock of TCS will have to move Rs.12.50 either of the ways to be profitable. If the costs are down to 30 bps, the movement required is only Rs.7.50. That makes a big difference to your trading speed, the churn and the ROI.
In a nutshell, discount broking not only segregates the research and the execution but genuinely makes a difference to your breakeven point and your profitability.
Tradeplus is the brand of Navia Markets Ltd. Ltd. The essence of Tradeplus is to provide Online trading clients with lowest brokerage in Online Trading Industry, sophisticated trading and back office platform and dependable customer service. We like to be innovative and you will feel this in dealing with us – right even at the stage of opening an account.Â