Things to You Need to Know About Zero Brokerage on Loss-Making Trades
Over the last decade, the online share trading landscape has changed with the launch and evolution of discount brokers in India. Traditionally, brokers would offer a trading account bundled with a range of services like investment advisory services, research reports, etc. These were called full-service brokers. The brokerage charged by them was high due to the added services.
Alternatively, discount brokers offered a low brokerage online trading account where all these services were made available for a small fee. Subsequently, zero brokerage trading evolved where the discount broker would charge a fixed fee per month and allow people to enter any number of trades without a brokerage charge. Now, many brokers have started offering an online trading account with zero brokerage on loss-making trades.
In this article, we will share things you need to know about these zero brokerage on loss-making trades trading accounts.
Zero Brokerage Trading
The Securities and Exchange Board of India (SEBI) mandates that all trades on a stock exchange need to be placed through a stockbroker registered with the exchange. Hence, people needed to approach a stockbroker for buying and selling shares and pay brokerage on every trade. The market had full-service brokers earlier who offered a basket of services and charged a relatively high brokerage.
With the advent of discount brokers, the share broking landscape underwent a lot of changes. It started as a low brokerage service with the stockbroker merely executing orders for investors. However, soon investors started expecting lower brokerage fees. As a result, zero brokerage trading evolved where the brokers charged a fixed amount every month to traders and allowed them to enter any number of trades free in the month.
Zero Brokerage on loss-making trades
In most accounts offering trading with zero brokerage, the fixed monthly amount would take care of the broker’s income and he wouldn’t charge the trader additionally for any order. However, the stock markets are volatile and highly competitive. In such a landscape, every additional charge can make turning profits difficult.
Hence, discount brokers started offering trading accounts with zero brokerage on loss-making trades to ensure that you are not charged anything if your trade results in a loss. This can be beneficial to active day traders as the breakeven point is lower than a regular zero brokerage trading account.
How does a zero brokerage on loss-making trades plan work?
When you place a buy or sell intraday order, there is no profit or loss unless you square off your position. Hence, for the first order, the broker charges brokerage. However, when you square off your position during the course of the day, you will either book a profit or loss. In a zero brokerage on loss-making trades plan, the broker will not charge any brokerage on the square-off trade if the net position is a loss. Therefore, your losses are minimized. Here is an example to help understand this well.
You purchase 100 shares of ABC Limited at 11 AM via an intraday order, hoping that the price will increase during the day. The purchase price is ₹50 per share. There are two possibilities:
- The share price increases to say ₹55
- The share price falls to say ₹45
Let’s look at the brokerage calculation:
In a regular zero brokerage plan, the broker would charge a fixed monthly fee or a flat fee on every intraday trade. Assuming that the brokerage per trade is ₹20, you will be charged Rs.40 (₹20 for buy and ₹20 for sell) as the brokerage for trading in the said share.
In a zero brokerage on loss-making trades plan, assuming the broker is charging ₹20 per profit-making trade, then you will only be charged ₹20 as there is zero brokerage on loss-making trades.
While zero brokerage trading ensures that you don’t have to worry about brokerage even if the size of the trade is large, with zero brokerage for loss-making trades plan, you have a better opportunity to avoid losses or reduce losses when your assessment of the stock price goes wrong.
The stock market has numerous opportunities. As a day trader, if you can identify the right opportunity, then earning profits is not very difficult. However, as a trader, it is important to be aware of various charges and fees that you are liable to pay for trading on the stock exchange. Whenever you place an order in the stock market via a stockbroker, you are charged brokerage. While this is usually a low amount, it can reduce profits in the long run. With many stockbrokers offering a zero brokerage on loss-making trades plan, you can be assured that your losses are not increased by added brokerage charges. Ensure that you choose your stockbroker after carefully considering all applicable charges.
Also Read: How to Calculate Brokerage in Share Market
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Low Brokerage and Low-Cost Discount Brokerage
In this article, we are going to talk about stock trading brokerage. When you buy an online trading account to start trading in shares, you choose a brokerage plan based on the way you intend to trade.
Frequently Asked Questions
Yes. While brokerage is the biggest charge, there are various other statutory and regulatory charges that are applicable to intraday trades. These are:
- Securities Transaction Tax (STT) levied by the government;
- Transaction Charges levied by the Stock Exchange;
- Goods and Services Tax (GST) levied by the government;
- Stamp Duty levied by the government; and
- SEBI turnover charges.
It is important to remember that GST is charged on brokerage and transaction charges (current rate = 18%). Additionally, charges related to your Demat account should also be considered while determining the total cost of trading in shares.
SEBI has mandated that all investors have to go through a registered stockbroker to buy or sell in the stock market. These brokers usually charge brokerage for offering their services to enter orders on the exchange. In recent years, many new brokerage plans have been launched by brokers to attract investors.
A zero brokerage on loss-making trades plan is a stockbroking plan where you are not charged any brokerage on intraday trades where the square-off trade is at a loss.