What is Zero Brokerage Trading?
Zero brokerage trading has become the new buzzword among the investors of the financial market. Despite the popularity, however, there is little knowledge about zero brokerage trading online and the benefits associated with it.
For the novice as well as a regular investor, knowing about zero brokerage trading can help with choosing a suitable trading account. It is easy to understand zero brokerage trading when it is compared to the traditional brokerage model for trading online.
How Do the Traditional Brokerage Charges for the Capital Market Work?
To buy or sell stocks in the capital market, one needs to open a trading account. Typically, when you open a trading account, stockbrokers levy a charge on their clients (investors) to execute transactions while trading online.
Investors need to pay a charge to open a trading account (some brokers enable free account opening) with a choice of their depository participant (DP). In addition to the trading charges, other charges are levied for the provision of certain specialised services.
Some of the services rendered under a full-service account include market research to provide a list of favourable investments or providing investment advice to investors. The brokerage fee includes charges for trading online (buying or selling of shares), consultation services, and delivery of shares. It is meant to compensate a broker for the execution of a transaction. These fees are paid on a percentage basis for each transaction.
It is recommended that when you open a trading account, you check with the DP about all the charges that you are expected to pay.
What is the Zero Brokerage Trading Model?
The concept of zero brokerage trading online started by keeping in mind the rising number of investors in the Indian financial market. To put it simply, with zero brokerage trading, an investor does not have to pay any charge for trading online. However, because there is inadequate knowledge about zero brokerage trading, brokers sometimes take advantage of this and package their services as zero brokerage when in reality, they have hidden charges involved.
To prevent this from happening, investors must ask their broker about the charges for their trading account upfront.
Zero brokerage trading exists to restructure the traditional brokerage model into something that is more cost-effective for investors. With zero brokerage trading online, the scaling charges are eliminated by the broker by doing either of the following: -
- Charging zero brokerage fee for equity trading or
- Charging a flat fee for each trade
What is a Discount Broker?
The zero brokerage trading account was started in the interest of the traders in the Indian share bazaar, and ever since its inception, it has been a matter of curiosity among investors. Where a zero brokerage trading account charges no brokerage fee on any trade, a discount broker facilitates the buying and selling of orders at a reduced commission fee. However, under a discount broker, other facilities such as research and advisory services are not provided to the investor.
Understanding Brokerage Charges for Trading Online
In India, for all financial products other than options, the brokerage fee is calculated as a percentage of turnover on the trade executed. For options, this is charged by the lot. To understand how zero brokerage trading online works, you can compare it with the traditional pricing model.
Consider that a broker charges 1 paisa on intraday equity trading and 10 paise on delivery trading. As an investor, you have placed the trade of: -
- Purchasing 1000 Reliance equity shares at ₹980 and
- Selling these shares at ₹990 on the same day
In this case, your brokerage charge would be (1000 x 980) x (0.01%) + (1000 x 990) x (0.01%) = 98 + 99 = ₹197
Contrarily, continuing on the same example as above, when a stockbroker charges a flat fee of, let’s assume ₹20 on each trade as part of the zero brokerage model, then the total charges would only be ₹40. This way, the investor will have saved ₹157 behind their trade.
Benefits of Zero Brokerage Trading
When you go to open a trading account, it is advised to check the services offered by different providers so that you find the one that is most suitable to your style of investing and trading online. Following are some of the benefits of the trading account with zero brokerage:
- Investors having a trading account with zero brokerage need not worry about the size and volume of the trade
- The chances of profitability are higher because the break-even point for a trading account with zero brokerage is lower
- A pure zero brokerage trading account is transparent and does not have any hidden charges
- Investors can engage freely on all major exchanges in India
- No pesky persuasion by relationship managers to increase the trading volume so the broker can benefit from a higher brokerage
- The procedure to open a trading account with zero brokerage is easy and hassle-free
- When you are trading online with your zero brokerage account, the fund transfer to and from your account is seamless
- If the investors get stuck somewhere, the stockbrokers offer instant phone and email support.
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Zero Brokerage Online Trading Account in India
Before one starts to invest in the capital market with their trading account, it is important to know the basics of trading online. While the internet is a great place to start expanding on your knowledge about investments, it is recommended to find a reliable investment specialist who will guide you along the way. This is because unless an investor is committed and disciplined, they can incur heavy losses in the stock market.
Frequently Asked Questions
The three most crucial benefits of a trading account include: -
- No worries about the size and the volume of the trade
- Chances of higher profitability on trade because of lower break-even point
- Saving money while executing each trade
When you open a trading account, you get the benefit of added services such as research on the market and investment advice. However, with a full-service trading account, you are expected to pay the broker a fee for each trade executed in the financial market. Contrarily, with a discount broker, you can eliminate the trading charges as no brokerage is charged for any kind of trade.
Usually, when trading online, investors have to pay a certain brokerage charge on each trade executed in the capital market. However, when they open a zero brokerage trading account, the discount brokers charge no brokerage fee on any kind of trade.