Trading in financial securities (such as stocks, bonds or mutual funds), requires the service of a Broker, who brings the Buyer and Seller together, for a commission or a fee, called Brokerage.
Every trader stands to gain by understanding the mechanics of how the broad term ‘Brokerage’ is levied, and the components of his ‘all in cost’ involving all Demat and Trading account-related charges. While the use of a ‘Online Brokerage Calculator’ automates the process, there are many ways in which he can reduce his costs, which in turn will improve his overall profits from trading. The greater the profits, the greater the incentive to improve his market presence.
While opening a Trading account, the Brokerage rate is agreed upon, through a contractual agreement and this is usually a percentage on the turnover (Buy and Sell included). Hence the Broker charges a percent (say r %) of each and every traded volume in terms of money
(ie. Buy or Sell price per share —– X —- No of shares traded —- X —- r %).
This is the fee charged by the Broker for his services which include, taking trade orders, placing them in the market, getting an acceptable counterparty through the Exchange, concluding the deal, arranging the settlement of shares or settlement cash value credited into his Bank account and allied services. This is either done through an offline, physical process or through an online broking app service developed by him, in a secure and guaranteed manner.
One service Brokers can now offer is an MTF or Margin Trading Facility, where Brokers extend margin funding services against cash or shares as security. Such accounts attract a rate of interest as well, where actual funding is involved.
Brokerage rates vary depending on the type of Broker, range of services provided, as well as on the type of transaction.
Types of Brokers
- Full- Service Brokers or Traditional Brokers provide the full gamut of service ie. trade orders, settlements, trade advisory services, market research, funding assistance (margin trading and Demat loans against shares) and portfolio management. Their Brokerage rates are higher by comparison
- Discount Brokers concentrate on trade and settlements alone and offer lower and competitive rates of Brokerage. They are able levy a flat fee per trade, even as low as Rs. 10/transaction. Hence, they are useful for high-volume traders, in keeping costs down
- In recent times, the rigid borderline between the above two types, is not so evident as, some Traditional Brokers offer multiple tariff plans, customized to suit differing styles of trading. So, traders generally shop around and try to find one that would best suit their trading pattern and cost effectiveness.
Brokerage charges based on Trade type
- Intraday Trading involves buying and selling shares within the day and thus squaring the position by the day end. Though pay in-pay out takes place, the total end of day balance of shares does not change. The charges may range from 0.01 to 0.05% of traded volumes or even free of charge and thus, is relatively cheap.
- Delivery Trade involves holding the bought or sold position (in case of F&O segment) overnight, where investments are made with a short or a medium-term market view in sight. In such cases, Delivery Charges are levied at a slightly higher rate (eg. 0.20 to 0.75% of traded volume).
Other Costs included in Trading in securities
- Transaction Charges levied by the Stock Exchange on all trades (BSE:0.003%; NSE:0.00325% on turnovers)
- Security Transaction Tax levied by the Govt of India (Intraday sell and Delivery trade both trades
- Stamp Duty levied by respective States on all purchases
- Turnover fee levied by SEBI
- GST on Brokerage @ 18% shared by the Centre and State Governments
- DP Charges initially levied by the Depository and passed on to the investor on all Sale of shares
Ignorance is never an excuse, but Knowledge empowers you! Be informed and vigilant to optimize profits when venturing into the stock market.
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