There are numerous online brokers which provide you online trading service. But selecting the right broker can make a huge difference in your returns in long term. And now with the number of options available with stock brokers, it is important that you fully understand what each brokerage type has to offer and select the one which meets you need.
The Stock brokers can be divided broadly into three types
1) Pay as you trade
2) Prepaid brokerage plans
3) Fixed brokerage per trade
Try to understand how these three brokerage types works and then only you should be able to select the one which is best suited for you. It should not be the cheapest one but should be the one which helps you in meeting your goals and expectation with investing.
Pay as you trade – Full Service Brokers
This is the oldest and if you have traded before the one which you should have come across for sure. In this you pay brokerage for each trade, mostly a fraction of your trade value. For example, you may come across a broker who charges 0.5%, or 50 paise for every Rs 100 worth of shares for delivery trade. Of course, some put a minimum brokerage amount, say Rs 25. So if you buy shares of Rs 50,000, you will end up paying the higher of the minimum brokerage ( Rs 25) or the brokerage at 0.5% i.e. Rs 250.
Apart from this brokerage charges, there would be a service tax on brokerage and STT and other taxes. Do understand that even if the brokerage is .5%, there would be service charges of 10% on brokerage making you effective brokerage to be .55%. These brokers also provide under service and usually have a trade facilitation desk which will make sure that you trade often. They also come up with weekly newsletter and most of the time is suited for the new investor. The main brokers which works on this brokerage are HDFC Security and ShareKhan. They are also know as Full Service brokers which provide all the service required for trading starting from equity research to technical help to even physical contract notes. One thing to remember with them are you can mostly negotiate the broking rates with them. So if you are a trader trading in F&O and trade often, most often they will cut their rates and would be able to provide you with competitive rates. But still these rates would still be much higher than discount brokers.
Prepaid brokerage structure
This is similar to Pay as you trade but they have a prepaid amount that they will charge at the start of the year or quarter and based on the amount you are paying, your brokerage would be decided. The higher the prepaid amount the smaller would be brokerage. They negative point with these types of brokers are you have to pay the brokerage upfront and you would forfeit the brokerage which you are not able to use which means that in realty you will end up paying a higher brokerage. Just to give you an example, For example, if you pay Rs 15,000 in advance, you can do a delivery trade at a brokerage rate of as low as 0.2%, or 20 paise for Rs 100.
This is a good option for traders which are sure that they will be trading atleast for a specific amount for that quarter/year. This brokerage plan is provided by reputed brokers like Religare security and ICICI security. They all provide most of the services as a full service broker.
Fixed pay per trade – Discount brokers
This is a relatively new phenomenon in Indian markets for individual investors. Here the size of the trade is irrelevant. The online discount broker charges you for each order executed on the exchange. Just to give you an example if you are buying 100 shares of Reliance for Rs 900, the brokerage charged would be fixed at Rs 20/25 per trade depending on the broker you choose. They have the lowest brokerage structure compared to other brokers but keep in mind that they don’t have a office in every city. Most of them work completely online and you won’t be able to see the face of your broker ever. So if you choose them, expects to take charge of things. In other words, don’t expect a dedicated relationship manager, no fundamental equity research and no technical calls and of course, no physical contract notes at your doorstep. Learn to live in the virtual world. This could be a best option for trader if he is comfortable to work online.
This could be could for trader/investor who are comfortable with use of computer and don’t want anybody to hold their hand while trading. They have the lowest brokerage by far and they do provide some online services which are not even provided by full service broker. The major fixed pay per brokers in India are Zerodha, RKSV and TradeJini.
Research and Decide
All of the brokers even the small city brokers do provide online share trading to their customer. So if you want to select the cheapest broker, fixed pay per trade broker is best but remember that you have to choose your own investment and there would be no one who will be there to help you. In case you are just starting and want some guidance, full service brokers in not a bad choice. Trade through them for some time and once you are comfortable with trading online, you can switch to fixed pay per trade brokers.
Some people question about how safe these brokers are and is there any chance of them closing the shop and running with your money. Most of the brokers are safe nowadays and SEBI have some stringent guidelines which have to be followed. So don’t worry about brokers we have reviewed on indiansharebroker.com. They are big brokers and none of them is a flight risk.
As I have explained the major type of brokers in India, make sure that you research before deciding on which will suit your need the best. You will find review of most of the broker in here, but it is up to you to best understand your needs and choose a broker.
In the end, I would advise you that if you are a novice trader and not very comfortable with computer, you can start trading will pay as you trade broker. But if you are someone who understand the basic and is comfortable with computers, the best choice for you could be using the fixed pay per trade or Discount broker. In case you still have some question, feel free to leave a comment below.