A Step Up From Full Broking- Discount Broking

There is a need for brokerage services to maintain an interactive connection between the market and market participants in today’s market. These services come in the form of full service brokers and discount brokers. Best Discount broker in India is a relatively new concept. However, with the growing number of internet users, discount brokerage firms are rapidly becoming the new option. Discount brokerages are an advantage for those who already have sound knowledge of the stock market and can carry out their own research.

The pricing structure of full service brokers

  • They charge 0.3-0.5% on transactions on the execution of every trade. The derivation of this particular number depends on three factors- cost of execution, cost of advice, and cost of funds.
  • Cost of execution – The action of passing the trade to the exchange centre irrespective of online or offline mode is charged.
  • Cost of advice- A research and development team is employed to implement buy sell recommendations. In addition to those, valuable advice concerning the roundabouts of the stock market sales is also imparted to novice investors by them. This team has to be paid by the brokerage firm.
  • Cost of funds- For the period between placing the trade to the settlement of the trade between the client and the exchange, the working capital is blocked by the intermediary broker. This block lasts for a period of 2-5 days.
  • The cost of the funds rates is in the form of a percentage, which means that it completely depends on the size of the trade. Brokerage firms are at a high advantage as the cost is directly proportional to the size of the trade placed as the working capital blocked is higher and there is an ultimate increase in cost.
  • The bundled pricing structure in this current scenario must change.

The discount broker service

  • Discount brokers offer online models of trade at a flat fee price. Since the entire process utilizes the internet, there are no branches of these firms. However, even though there are currently 20-30 discount brokerage firms in the country, these firms are still stuck on providing the primitive base model.
  • A pay per trade model is offered to consumers. This model entails a no-frills arrangement, which entails a complete waiver of demat services, advisory services, and blocked working capital by the broker.
  • However, clients lose flexibility while opting for discount brokers as they cannot even simply buy a stock with a larger value with a prior commitment to pay it off. The rigid system prevents the clients from taking conducive risks.
  • The increase in stocks can cause a loss if the risk could have brought in more money than the amount saved with the discount brokerage firm.

Hence, over the past few years, there has been a neck to neck competition between discount and full-service brokers, even though full-service brokers have ruled the market for a long time. A balance between discount brokerage and traditional brokerage needs to be utilized to find optimal gain while stimulating the market.