Demat Account: How to choose between full-service and discount brokers?
Discount broking firms have outperformed traditional full-service brokers with lower fees and faster account setup. However, full-service brokers provide extensive market experience and services like asset management.
Selecting the right depository participant (DP) for your demat account is as crucial as choosing the appropriate bank account for seamless banking transactions. Your demat account acts as the gateway to stock investing and trading in various securities like derivatives, bonds, commodities, and mutual funds.
In recent years, there has been a significant increase in demat account additions, driven by growing awareness about stocks. Regulatory efforts and a greater willingness to take on risk have encouraged young Indians to explore stock market investments.
Indian households are transitioning from traditional bank deposits to stock investing, either by directly opening demat accounts or investing through mutual funds.
The surge in demat account openings gained momentum in 2019, during India’s first lockdown. With people working from home and schools closed, individuals had more free time to explore investment options.
During this period, discount broking firms experienced a surge in popularity among retail investors, emerging as preferred options for demat account openings. These firms facilitated account opening through mobile apps, providing users with a seamless and convenient experience directly from their smartphones.
Discount broking firms like Groww and Zerodha hold over 40% of India's active clients. This trend isn't exclusive to India; globally, discount broking firms dominate the market landscape. For instance, in the United States financial markets, Robinhood, an online discount broking firm, holds a significant share.
In this article, we'll delve into the key distinctions between full-service and discount brokers to help you decide which service best suits your needs when opening a demat account.
Full-Service vs. Discount Brokers
Discount broking firms: Over the last four years, discount broking firms have surged ahead of traditional full-service broking firms. They offer lower brokerage charges or flat fees, along with minimal or free demat account maintenance charges. They also provide high-speed trading in stocks, commodities, and forex.
Moreover, these discount brokerage firms have simplified the process of opening a demat account. They often require less paperwork and offer account setup within a day, provided all necessary documents are submitted accurately.
These firms provide trading services through mobile apps, catering to the convenience of young and tech-savvy traders.
Full-service broking firms: On the other hand, traditional full-service brokerage firms boast extensive experience in the stock market. They have long-standing relationships with clients spanning decades. These firms offer a comprehensive suite of services, including executing buy and sell orders, providing research on current market trends, issuing trading calls, and offering industry-based reports.
Additionally, they provide asset management and retirement planning services and allow traders to invest in various financial instruments.
Which DP is right for you?
For those who trade full-time, low brokerage fees may be a priority, leading them to select a DP based on the cost of brokerage. However, it's equally important to assess the efficiency of the DP's platform. A slow or glitchy platform can hinder your ability to execute trades promptly and accurately, potentially causing you to miss out on buying or selling stocks at your desired prices.
On the other hand, if you're new to trading, you might lean towards a full-service brokerage because they offer support with research reports and trading advice. However, compared to discount brokerages, full-service brokers typically charge higher fees due to their larger operational costs, including maintaining branches in major cities. Over time, these higher fees could erode your profits, especially if you're making frequent trades within a short period of time.
In summary, discount broking services are suitable for experienced traders who make their own decisions, while full-service broking services are ideal for new traders who require assistance, guidance, and support provided by these firms.
FAQs
What is the role of a stock broker?
A stock broker is an SEBI-registered intermediary and a member of a stock exchange, authorised to execute trades on stock exchange platforms.
How can investors confirm a broker's registration?
Investors can verify a broker's registration details on SEBI and the respective stock exchange websites.
What factors should I consider when comparing brokerage fees?
In comparing brokerage fees, consider not only commission charges but also additional fees like account maintenance charges and transaction fees. Assess the overall value proposition, including service quality and trading platform features, offered by the broker.
What are the maximum brokerage charges allowed by stock exchanges?
The maximum brokerage that brokers can charge varies across stock exchanges. As per the BSE and NSE, here are the permissible brokerage rates:
Capital Market Segment: Brokers can charge a maximum of 2.5% of the contract price, excluding statutory levies. For shares valued at Rs. 10 or less, a maximum brokerage of 25 paise per share may be collected.
Futures Contracts: Brokers can charge a maximum of 2.5% of the contract value, exclusive of statutory levies.
Option Contracts: Brokers charge brokerage on the premium amount of option contracts bought or sold, not on the strike price. The brokerage should not exceed 2.5% of the premium amount or Rs. 100 per lot, whichever is higher.
In the derivatives segment, brokerage is only applicable for trades executed on the stock exchange; hence, it cannot be levied on expiry, exercise, or assignment of contracts.
Can I open a demat account with both full-service and discount broking firms?
Yes, you can open a demat account with both full-service and discount broking firms. Each type of broker offers different services and fee structures, so you can choose the one that best fits your trading needs and preferences.
Catch all the Instant Personal Loan, Business Loan, Business News, Money news, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
- Top Gainers
- Top Losers
- 52 Week High