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The advantages of having low brokerage in online trading

The advantages of having low brokerage in online trading

The whole excitement of online share market trading stems from the fact that the trader has the complete control over the entire trading process. From the placement of the order to the execution and the monitoring; the trader can do everything without any help. This also makes the entire process highly transparent and simple. The lower brokerage charges also make it much simpler for the trader to churn the funds aggressively as the break-even point for the trader comes down drastically. This enables the trader to churn capital more profitably.

There are costs to trading apart from brokerage

  • Brokerage is the fee you pay to the broker for executing the transaction and managing the risk. This brokerage ranges from around 7-10 bps in case of intraday trades and from 30-50 bps in case of delivery trades. In the case of futures and options, the brokerage rates are much lower. But, brokerage is just one of the costs of trading and you need to know the other costs.
  • There is a securities transaction tax (STT) that is collected by the government based on the value of the transaction. In case of intraday trades the STT is imposed only on the sell leg of the transaction while in case of delivery it is imposed on both sides. The STT is collected by the broker on behalf of the government of India.
  • Goods and services tax (GST) was imposed from July 2018 replacing service tax and this took the cost up from 15% to 18%. The GST is imposed on the total brokerage amount collected by the broker and that also adds to the cost. The GST is collected by the broker indirectly on behalf of the government.
  • While the GST and the STT are collected at a fixed rate by the government, the stamp duty is a state levy and the rate of stamp duty differs from state to state. The stamp duty is also levied on the value of the transaction. The stamp duty is mandatory because all contract notes generated in a state have to be stamped and a levy is payable to the state government.
  • On top of all these charges, there are two additional charges that are payable to the regulators. There is an exchange fee that is payable to the stock exchange. While NSE has an ad valorem rate, BSE has a fixed rate for the fee. In addition, there is also a SEBI turnover fee that is payable to the regulator and that is also collected by the broker as part of the contract note.

Insist on competitive brokerage when you are trading online

One of the keys to success in trading is keep your broking costs lost. Here are 3 reasons for you to focus on reducing your costs of trading

  • As demonstrated above, brokerage is not your only cost. There is a cost in terms of other levies like STT, GST, stamp duty, regulatory fees etc, which can add up to quite a number. Also, there are indirect costs like liquidity costs, cost of higher spreads, cost of incomplete information etc. When you keep your brokerage competitive, it is a primary advantage for the trader.
  • How do you generate ROI in trading equities? The basic method of generating ROI is to churn the money fast enough at very low costs. That is only possible with low brokerage rates. When you trade frequently, the cost of trading can make a big difference to the break even of your trade and also to the eventual ROI.
  • In trading there are a variety of additional costs like demat related costs, AMC charges, payment gateway charges etc. Then there is the cost of governance and transparency in many Indian companies. A competitive brokerage at least partially compensates for the variety of costs that the investor or trader has to incur.
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