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Photo: Mint

The  popular  zero brokerage model isn’t without risk

Zero cost brokerage has become an attractive stock broking model in India, challenging the traditional full service model by cutting down costs dramatically for equity investors. These new-age brokers have seen a surge in clients especially during covid. Mint takes a deep dive

Zero cost brokerage has become an attractive stock broking model in India, challenging the traditional full service model by cutting down costs dramatically for equity investors. These new-age brokers have seen a surge in clients especially during covid. Mint takes a deep dive.

How does a zero cost broking model work?

Zero cost brokerage is part of a discount broking model pioneered by companies such as Zerodha.

In this business model, zero or negligible brokerage charges are levied for certain types of transactions. For instance, Zerodha does not charge any money for delivery trades. These are trades in which you actually take delivery of stocks in your demat account or sell stocks that are in your demat account. These trades are most commonly carried out by retail investors. Technology is an important part of discount broking because it slashes costs and allows brokers to offer free services.

What makes such a biz model sustainable?

While the model entails minimal or no brokerage, discount brokers do charge money for carrying out other types of trades such as futures and options (F&O) or intra-day trades. In the latter, you buy and sell the stock on the same day and hence do not take delivery. They also try to sell other services such as stock screener tools or thematic portfolios which you can replicate. The category which involves brokerage charges can differ from one player to another. For instance, Kotak Securities Ltd on Thursday launched a zero brokerage intra-day plan, which also includes a 20 per order plan for all other F&O trades.

Cost analysis
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Cost analysis

What are the different types of brokers in trade?

The conventional variety of broker is called full service broker, who levies high charges and in return offers research reports to clients. However, relying on broker advice to manage one’s equity investments can lead to suboptimal outcomes, as they may be incentivized to get clients to transact continually. Many full service brokers have moved to a part-discount model of late.

Are there any other charges involved?

Yes, brokerage is not the only charge involved in stock trading. You also have to pay securities transaction tax (STT), stamp duty, transaction charge from the stock exchange, GST on brokerage and transaction charges, Sebi charges. There are also charges related to demat account such as an annual maintenance charge and charges on debit transactions from the demat account. Most of these are however quite low. For example STT on delivery transactions is 0.1% or 1 per 1,000. The NSE transaction charge is 0.00325%.

Is zero cost brokerage a preferred bet then?

A discount broker can greatly cut down the costs of equity investing. However, not all discount brokers may have sustainable business models and this can present a risk in future. One way is to stick with those who have a well-established track record. With regard to equity research and portfolio analysis, you can approach a Sebi Registered Investment Advisor (RIA) to get advice. This approach separates out the research function from the brokerage function and may give you access to high-quality unbiased research.

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