Discount Brokers are a new segment of stock brokers emerging very fast in this industry. These companies are growing fast as they are offering trading services at a very low brokerage fees. USP of Discount Brokers is Low Brokerage charge.
This article would discuss about the Discount Broker, What is a Discount Broker and what is his role, How do they make money, what are the advantages and disadvantages of working with a Discount Broker etc.
What is Discount Broker or Who is a Discount Broker?
A Discount Broker is someone who will helps you trade with the Stock Exchange and lets you buy or sell shares but at a lower brokerage rate as compared to the other Stock Brokers in the market.
Most of the discount brokers will offer you “Do-it-yourself” trade options wherein you can directly trade using a trading platform and without being assisted by anyone. However, they do not provide advisory or financial planning related services to the customers as in the case of the Traditional Brokers.
They follow the online protocol of trading and register every customer online with them so that they can trade directly using their respective portal access. This is the most appropriate method of trading for those who are experts at trading; however someone who is just starting out as a trader and is still very novice in that field, it would not be a very feasible option.
History of Discount Brokers in India
In the recent times, there are quite a few companies emerging as Discount Brokers and they are doing some good amount of business too as they are attracting more and more fresh traders for business.
Some of top Discount brokers in India are Zerodha, 5Paisa, SAS Online, SAMCO Securities, UPSTOX, ProStocks, My Value Trade, Trade Smart Online, RK Global and Wisdom Capital.
Most of these discount brokers offer cheap brokerage plans or unlimited brokerage plans wherein they charge a fixed amount per month or annually and the customers can do unlimited trade irrespective of the number of trades and the amount of trades.
Due to these unlimited plans, they are also known as Budget Brokers or Flat Fee Brokers who charge a flat fee for unlimited trade. Its not been a long time that Discount Brokers have ventured in India; this concept started out since early 2010.
However, the concept has spread like an epidemic in the Indian Stock Broking community and ever since these Discount Brokers have been launched, India has seen thousands of regular traders move out of Traditional Brokers and they have joined Discount Brokers.
Not only this, ever since Discount brokerage system has been launched a completely new set of population has started trading in Stock Market thus uplifting the entire ecosystem.
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List of Discount Brokers in India
Services Provided by Discount Brokers
As mentioned earlier, Discount Brokers carry out cheap trades or charges flat brokerage to their customers and this is the best and most economical service one can get. They are considered to save you atleast 60-80% of your brokerage cost as compared to the Traditional Full Service Brokers.
However, Discount Brokers do not offer any personalized services like consultations, tax advice, research and analytics, retirement planning and estate planning etc for their customers. They also don’t deal avidly with High Net worth Individuals as they offer services at lesser commissions.
They just execute trading commands for their customers and mostly operate through an online mode so as to save on infrastructure and office maintenance costs. Discount Brokers, on the other hand, are known to come up with extremely user friendly and advanced training platforms, as that’s the pulse of their business.
If they have a really robust trading mechanism and back office tracking tool, the customer is already on an auto-pilot mode and doesn’t really feel the need for personalized services.
Products Provided by Discount Brokers
Most Discount Brokers have registered membership with all Stock exchanges like NSE, BSE, MCX, NCDEX, ACE, ICEX, MSEI etc. They generally try to have a bouquet full of products with them to offer to their customers as that is one fruitful way to ensure maximum penetration in the market.
If they become the one-stop-shop solution for all your financial needs, then you are sure to stay with them for long. Hence most Discount brokers offer a variety of Products like Equity, Debt, Currency, Commodities, Derivatives, Mutual Funds, IPOs, Insurance, Repository services, Forex, SIPs, Bonds & Debentures etc.
Why open Demat & Trading account with Discount Broker?
A Demat Account is like a saving account for shares. It will hold your stock or shares safe. Hence the first thing that one needs to do before even thinking of trading is Open up a Demat account to store all shares purchased.
Most Discount brokers will open up your Demat Account for free or for a very nominal charge.
A trading account, on the other hand, is essential which enables a person to start trading with his or her shares using the Discount brokers trading platform. In order to start any trade, you need to have a trading account opened with the broker.
Trading accounts also don’t generally have a charge but a few Discount brokers charge an annual maintenance fee for the Trading Account.
Most Discount Brokers’ Trading accounts allow you to trade in all segments at one go be it Commodity, Equity, or Currency.
How to Open Demat & Trading Account with Discount Broker?
Demat Account & Trading Account opening will go hand-in-hand. You will need to open up both Demat account to keep the shares and Trading account to start trading. It’s a very simple procedure to do the same:
- First, you need to decide which Discount broker would you want to get associated with.
- Thereafter, you need to fill in the online form for both Demat & Trading Account on that company’s website.
- Enter all your KYC information accurately like full name, contact number, email id, address along with landmark and also your occupation details etc.
- You can also upload all your documents incase they have an online documentation procedure.
- Once you have done that, someone from the Broker’s office will contact you to check all the details and to confirm whether you are interested in opening the Demat & the Trading account. They will also explain to you the charges and fees if any for opening up these accounts.
- They also do an In-Person verification sometimes for the documents.
- Once the verification process is done and the documentation is also complete, your Trading account and Demat Account will be activated and you will be provided with the relevant credentials.
All Discount Brokers open Demat & Trading Account online only & non of them have major physical presence which will support offline form fill-up & collection process.
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How do Discount Broker makes Money?
A Stock broker earns from the commission or brokerage paid by customers for trading. In the traditional Full Service Broker model, the commission or brokerage charges were pretty high and that’s how the Broker used to make a good amount of take home.
However, in the Discount Broker Model, the rates have been slashed to nearly 50-60% of the original ones & ost of the Discount Brokers charge Flat Fee of between Rs.10 to Rs.20 per Trade. Then how does the broker make money? Lets see how.
First and foremost the Discount broker has completely reduced his overhead costs. So the initial investment on office space, staff, stationary cost, travel costs etc have been cut down drastically.
The only infrastructure that the Discount broker works on, is his Trading Platform. They invest in making a robust platform and give it away to customers with an annual access charge which makes their as well as their customers’ lives easier.
These platforms are generally based on DIY methodology where one can easily take a demo on how to trade and get started himself without any assistance.
Subscription Plan – Monthly or Yearly
The Discount broker also launches some fixed rate brokerage plans wherein one can pay a monthly subscription fee and trade unlimited.
These subscription fees also becomes his earnings. There are also plan that have a per trade rate For Eg: Bonanza Portfolio charges Rs. 20 per trade brokerage irrespective of the amount of trade done.
Apart from Brokerage, the broker also markets other financial products and the commission of those product sales also become his earnings. Moreoevr, some other brokers also charge a nominal amount towards the Annual maintenance of the Demat and the Trading account.
Overall the Discount broker makes money by adding more and more customers in his network by way of word-of-mouth marketing. The more customer trade through him, the more profits he would yield in the business.
Does any Discount Broker provides Leverage or Exposure?
Leverage or exposure are the necessities of the Stock Broking industry and any investor would look for that benefit in a broker. The Discount brokers are well aware of this requirement, and have designed strategies to provide the same to their clients as well.
Discount Brokers like Wisdom Capital offer upto 40 times leverage for Intraday Equities trade. Other brokers like Trade Smart online, Upstox, 5Paisa, Bonanza Online, SAS Online etc also offer around 20-30 times leverage to their customers. They have to fulfill this requirement to be in business.
Are Discount Brokers good for Beginners?
People who are starting out in the Stock Market space are mostly not well aware or equipped to handle the entire knowledge downpour in one go. This business is something that grows with you and you develop it with experience.
Even people who have been in this industry for ages can vouch for it that there is always a new learning and hence no prediction can be 100% foolproof. A new entrant, who is a first time trader or has just begun, needs a lot of support with respect to reading and understanding market trends, check market speculations, understand which stocks to invest and for how long to stay invested etc.
And that kind of support is not given by the Discount brokers. They would surely help you with aids like research analytics and reports, current market trends, newsletters etc however will not be available for individual guidance.
Hence, it would become very difficult for a beginner to work with a Discount broker especially if he does not have knowledge about this industry.
Are Discount Brokers good for Intraday Traders?
Before we figure out whether Discount brokers are good for Intraday trades or no; we would discuss about what exactly is Intraday Trading and what do we need to take care in Intraday trading.
So, Intraday trading, as the name suggests, is basically same day trading of shares which means buying and selling of shares within the same day before the market closes. This is something a lot of people do especially who have been in the stock market trading since long.
A beginner would not get into Intraday trading from day one. What sis critical to understand in Intraday trading is that the Broker should be able to provide tools and systems that are efficient enough to handle impromptu transactions and regular research updates and tips so that traders could make calculative decisions.
Brokers need to be up to date with their analytics and intraday tips for the customers to leverage from and be able to assist with high performance tools integrated to this purpose.
Discount Brokers has the benefit of advanced Trading platforms and most of them have been customized to handle Intraday volume as well. Moreover discount brokers also provide Intraday leverage or exposure to their clients; hence a lot of people opt for them.
Discount Brokers are surely good for Intraday traders; however it is always recommended to check all intrinsic details and charges first before starting off with them.
Are Discount Brokers good for Long Term Investors?
Long Term investors generally don’t trade too often and keep the stocks that are bought to elevate in price before they could sell them off. They are the ones who also trade in high volumes.
Now, if they were to trade through a Full Service Broker, they would end up paying a percentage of the traded amount to the broker. Even if they pay 0.05% of the traded amount, that becomes a huge amount of brokerage if the trade is done in lakhs.
For eg if the trade is worth 50 Lakhs, then the customer would end up paying Rs. 2500 as brokerage. However if you were to choose a Discount broker, you could easily opt for their unlimited trade plans and trade free throughout the month without any capping on number of trades or amount of trades.
Many Discount brokers like Zerodha, SAMCO Securities, Bonanza Online and Trade Smart Online offer monthly subscription brokerage plans. Hence for a Long Term investor, Discount Brokers are the best bet as they would end up saving a lot on their brokerage charges.
Advantages of choosing a Discount Broker
If you are someone who has been in the Stock market space and knows how to trade without guidance, but are also looking for smarter and efficient ways of trading as well as tracking, the Discount Broker is the best choice for you.
Discount brokers come with a lot of benefits for their customer:
- The first and foremost advantage of a Discount Broker is their savings on the brokerage. Their brokerage plans are so cost effective that you tend to save nearly 60-80% of the commission paid as compared to a traditional Full Service broker.
- Their world class Trading Platforms and backoffice tools help you seamlessly trade on the go from anywhere you are and also you can keep a track of all your transactions and brokerage without manually keeping a track of it.
- Because Discount Brokers are not into selling products as their core business, hence you would never find them pushing you or convincing you to buy certain stocks
- They provide a lot of educational and self-learning material for you to study and learn
Disadvantages of choosing a Discount Broker
There is always a flip side to a coin and so is, in the case of a Discount Broker as well. Working with Discount brokers could have some disadvantages as well:
- With a discount broker, you can’t expect any guidance or support as what you were getting from your regular broker. Hence there would be times when you would struggle in making your decisions in the absence of any financial advice
- Most Discount Brokers have their entire operations done on the internet itself and don’t have a customer service or a backoffice team. That would be a concern in case you are stuck somewhere and want immediate assistance
- The Lower commission rates doesn’t mean that it is the only means of earning for the discount broker; sometimes they charge extra charges for services which were not told earlier. Hence a lot of people are speculating about it and stating that discount brokers have hidden charges in their modus operandi. Therefore it is advisable to read all the finer details as well in the contract before signing up so that you are absolutely sure of what you are paying for.
Discount Broker Business Model Conclusion:
Discount Brokers, as we have seen, started off in early 2010 and in less than 9 years have become a rage amongst Indian Traders. They offer commission or brokerage at slashed rate, they save our brokerage amount which we can further invest in other stocks, they provide state of the art world-class trading platforms which offer seamless trading experience and they also offer extremely efficient and robust back office engine which can manage all our trading details.
Hence, Discount brokers are definitely the next gen trading partner for you who can provide you with latest equipment and trading tools. However, on the flip side, they may not prove to be as beneficial for a new trader as they do not provide advisory or guidance services to anyone.
A beginner may need that support and financial advice while starting off, which is unavailable with the Discount broker; hence it is advisable to check all details and them get into an agreement with them. Some of the discount brokers have multiplied their business tremendously in the last 10 years and growing rapidly today as well.
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