Know What Does it Mean by Pay Only When You Profit | Espresso

What Does it Mean by Pay Only When You Profit?

The stock market provides numerous opportunities for traders and investors. Intraday trading has evolved as a good source of income for many people around the globe. By analyzing and estimating the direction of the market and taking a position accordingly, you can earn good profits boost your income. However, there are some charges and fees that you need to be aware of before you start trading. One such fee is brokerage.

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While typically, stockbrokers charge brokerage on every trade placed by you, many new-age brokers have started offering innovative brokerage plans to help people reduce the brokerage liability and increase the opportunity to make profits. One such option is the ‘pay only when you profit’ brokerage plan that we will discuss in detail today.

Trading online in India

When you start trading online in India, you need to open an online trading account with a

stockbroker registered with a stock exchange. This is a mandatory requirement, since according to SEBI’s guidelines, all trades in the stock market need to be placed via a stockbroker. The broker charges brokerage for offering these services.

Traditionally, brokers would offer a range of services bundled with the trading service like research reports, investment advisory, etc. Hence, the brokerage included charges for all these services and was a substantial amount. With time, as competitiveness in the stock market increased and many people started opening an online trading account and trading in shares, discount brokers evolved who offered low brokerage on trades by offering only trading services.

The next step in evolution was the launch of zero brokerage plans where the broker charged a flat fee per trade or per month/year, allowing people to enter as many trades as they want without worrying about brokerage. This was welcomed by day traders as it allowed them to optimize earning opportunities in the market.
Also Read: Things to Know About Zero Brokerage on Loss Making Trades

Pay only when you profit in trading

In recent years, some stockbrokers have started offering a brokerage plan where you pay only when you profit in an intraday trade. In these plans, the broker does not charge brokerage for square-off orders in an intraday trade. Pay only when you profit in trading helps you reduce your losses if the markets move in a direction opposite to your assessment.

How does pay only when you profit in trading work?

When you opt for the pay only when you profit in trading, the broker looks at the square-off trade and charges you brokerage only when you profit. Let’s understand this with the help of an example:

Here are two trades done by you:

Trade 1

  • Company name: ABC Limited
  • Number of shares purchased via an intraday order: 50
  • The buying price of the shares: ₹50 per share
  • The selling price of shares: ₹52

Trade 2

  • Company name: ABC Limited
  • Number of shares purchased via an intraday order: 50
  • The buying price of the shares: ₹50 per share
  • The selling price of shares: ₹48

As you can see, in Trade 1, you have booked a profit, while in Trade 2, you have suffered a loss. Let’s say that the broker charges a flat fee of ₹20 as brokerage on each intraday order.

Hence, in a regular brokerage plan, you would pay ₹20 per order taking your total brokerage charge across both the trades to ₹40.

However, if you opt for the pay only when you profit plan, then the broker will not charge you for Trade 2 since you are suffering a loss. Therefore, the total brokerage charged across both trades would be ₹20 only.

Benefits of pay only when you profit in trading

Here are some benefits offered by pay only when you profit brokerage plans:

  • Since you are not charged brokerage on square-off trades where you suffer a loss, these plans help reduce your losses when the markets move contrary to your expectations.
  • Most brokers offering pay only when you profit plans, charge a flat fee for profit-making trades. This ensures that you don’t have to worry about brokerage for trades with a large ticket size.
  • With zero brokerage on loss-making trades, your breakeven point drops low. This increases your chances of earning profits.

Pay only when you profit brokerage plans can benefit all kinds of day traders. However, it is important to remember that there are various other charges associated with intraday trading too. Therefore, it is important to go through the schedule of charges carefully and understand the total charges applicable on every trade. With the stock markets being inherently volatile and an exponential rise in the number of people opting for day trading, earning profits requires a complete understanding of your outgoings so that you can determine the square-off price efficiently.

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Frequently Asked Questions

As a day trader, it is important to remember that not all your trades will be profit-making. Since the stock markets are highly volatile and investor sentiment can get influenced by a range of external factors, it is highly unlikely that all your assessments of stock price movements are right. Therefore, it is a known belief that losses are inherent to intraday trading.

Since all trades in the stock market are required to be placed via a stockbroker, you have to pay brokerage for every single order placed by you. In such a landscape, a loss-making trade with added brokerage can increase your losses. When you opt for a pay only when you profit brokerage plan, you ensure that the net losses on these trades do not include brokerage charges.

Pay only when you profit plans are also known as zero brokerage on loss-making trades plans. They are offered by stockbrokers to help traders make the most out of earning opportunities in the stock market.

In these plans, the broker does not charge brokerage on square-off trades where you are suffering a loss. This helps reduce your brokerage liability when your intraday trade is being squared-off in a loss-making position.