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Business News/ Markets / How can investors benefit from zero charges on broking? We explain
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How can investors benefit from zero charges on broking? We explain

The emergence of zero charges on brokerages through tech-led advancements has allowed investors to take control of their investments and participate in the financial markets with greater accessibility and affordability.

The Benefits of Zero Charges on Broking – Beyond What Meets the Eye (Photo by Tezos on Unsplash )Premium
The Benefits of Zero Charges on Broking – Beyond What Meets the Eye (Photo by Tezos on Unsplash )

The craziness of the capital markets is often told with amusing stories, where something completely unremarkable led to a sharp reaction in the markets worldwide. At times, it has been catastrophic and has mostly been bearable. Such unpredictability is the risk associated with capital investments, yet the brokerage service providers charge exorbitant commissions, reducing the portfolio's return.

Paying brokerage fees has long been an unwelcome aspect of investing and has existed for the longest time. As investors assume the risks associated with their chosen investments, it seems unjustifiable for brokers to claim a portion of their portfolios as facilitation charges. Traditionally, this practice was accepted until the early 2000s, particularly during the "irrational exuberance" era, where investor interest drove stock prices.

Brokerage fees can be likened to a tax on investors' funds, introducing friction into the investment process, diminishing potential earnings, and inadvertently dampening investor motivation. Any tax, whether stamp duty on real estate or brokerage charges on stock transactions, inevitably reduces investor interest. In the long run, this self-destructive business model unfolds: as traders engage in more frequent trading, brokers reap short-term gains while traders suffer long-term losses.

Consequently, the cost of retaining a trader or investor becomes exorbitantly high, ultimately leading to their departure from the capital markets. It highlights the adverse impact of excessive brokerage charges on investors, discouraging their active participation and undermining the long-term sustainability of the financial ecosystem.

Tech-led advancements raise relevant questions

With technological advances, the landscape has undergone a massive transformation, wherein there is the emergence of discount brokers and zero broking platforms, making capital market investments more attractive to retail investors. The logic behind some tech-based broking companies charging zero charges is quite simple.

For instance, if sending messages on platforms like WhatsApp incurs no charges, why do brokers demand fees for sending "execution messages" on exchange servers? From a technological and cost perspective, the processes are strikingly similar. Thus, the excessive charges levied by brokers warrant a closer examination.

Over the years, investors have increasingly questioned the rationale behind these fees, given the availability of alternative platforms that offer comparable services without the burdensome charges. As the investing landscape evolves, it becomes imperative to reevaluate the justification for these fees and explore ways to align them with the prevailing technological and economic realities.

How do broking charges discourage investors?

Consider a scenario where a user engages in day trading and is subjected to brokerage and clearing fees. To illustrate this point, let's assume the investor maintains a portfolio of Rs 10 lakh and conducts one trade per day, leveraging at a rate of 10X (the standard leverage for intraday or derivatives on the exchange).

Now, let's examine the costs involved. The user pays a discount broker an average of Rs 100 in commissions and clearing fees for every Rs 1 Crore transaction, both when buying and selling at 10X leverage. Consequently, the total cost amounts to Rs 200, encompassing commissions, clearing charges, and administrative or ticket charges. With an average of 252 trading days a year, the user incurs approximately Rs 50,000 in brokerage and clearing charges annually. Astonishingly, this translates to nearly 5% of the user's portfolio being paid to the broker solely for accessing the trading platform.

To put this into perspective, the interest earned by depositing the same amount in a bank account would be higher than the brokerage expenses incurred.

Furthermore, when considering the additional risk undertaken in the stock market, the returns may not surpass the exorbitant brokerage costs for at least half of the users. Given that every investment carries a 50% chance of making money, the user may eventually find it more appealing to shift their funds from the capital markets to banks.

Some platforms have realised the need to eliminate all charges to enable a smooth investment experience for investors where they get complete returns from their portfolios.

The emergence of zero charges on broking

The zero broking emerged from a thought-provoking question: if the transmission control protocol (TCP) is freely accessible, why must traders bear the cost of brokerage when sending messages about financial exchange protocols? As tech-driven platforms, broking companies can function with fewer overhead charges, they don’t need to charge high amounts of fees. As a result, discount brokers can facilitate trading anytime and anywhere through their smartphone apps.

As investors became increasingly aware of the impact of excessive fees on their investment returns, they sought alternatives that offered transparent and cost-effective solutions. Because of the growing acceptance of online trading and investment platforms like ours, new investors entered the stock market during Covid, motivated by the pursuit of supplemental income.

Conclusion

The advent of online discount brokerages has disrupted the traditional brokerage industry by offering investors a cost-effective alternative. These platforms leverage advanced technologies, such as sophisticated trading algorithms and user-friendly interfaces, to provide seamless trading experiences at significantly lower fees than traditional full-service brokerages.

Investors can access real-time market data, execute trades, and manage their portfolios efficiently through intuitive online platforms or mobile apps. The elimination of excessive fees and the convenience of these technological advancements have democratised investing, attracting a wider range of investors and reshaping the industry. Discount brokerages allow individuals to take control of their investments and participate in the financial markets with greater accessibility and affordability.

The brokerage industry is on the brink of a paradigm shift, where the concept of zero brokerage is expected to become the new norm, supported by the integration of innovative technologies.

Tajinder Virk, Co-founder & CEO, Finvasia

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Published: 05 Jul 2023, 08:39 AM IST
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