The digital world has seen several disruptive developments. For instance, airline ticket booking is almost completely an online process now. Until a few years ago,buying a book meant a visit to a book shop, which is fast finding its way to online buying if you like to read a book or completely go digital with e-books. While online stock trading has been there for several years, there is a different breed of online traders who are attracting more investors now with the stock market touching new highs. Typically, there are two types of online brokers in the market: full service or traditional brokers and discount brokers. Full-service brokers provide a range of services for both retail and institutional customers. Major full service brokers include the likes of ICICI Securities, HDFC Securities and Kotak Securities, which also offer full-service brokerage on the online platform. Full-service brokerages provide access to research, relationship manager, and most likely a local office for you to visit. In contrast, discount brokers usually provide an execution channel to retail customers to tap the stock market through an online platform.
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What’s the difference?
The biggest difference between the two is in the cost involved, which is also linked to the range of services they offer. For instance, discount brokers do not offer research and many of them also limit the asset classes that one can invest in through them. It is common for discount brokers to limit their offerings to equities, currency and commodities, unlike a full-service brokerage that offers access to a wider range of assets. In view of the limited asset class available to transact on, discount brokers eliminate the need for physical branches and costs associated with such a model. The cost savings are significant and are passed on to the customer by way of reduced broking charges. Additionally, discount brokers also offer plug-in facility for algorithmic trading where you can use standard strategies or indicators, or, build your own algorithmic trading that is based on your inputs. On such platforms, you can buy or sell at a pre-determined rate, irrespective of the size of the order. This works out cheaper for traders, especially for those who deal in options and who trade in large quantities. Let’s assume a trader is buying one lot of Nifty options that would involve a brokerage of Rs. 100 at most broking firms. So, if the trader bought 10 lots, the brokerage would cost Rs. 1,000. However, the same, if done online through a discount broking platform and in one order, would cost the trader only Rs. 10-20, depending on the broker. Zerodha, RKSV, TradeSmartOnline and RK Global, among others, have been changing the way discount broking works in recent years (See: How it stacks up for more).
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Is it for you?
Most retail investors will be better served by a full-service brokerage for the range of services they offer. However, if you are someone who can make up your mind when it comes to investing in stocks or other assets, and in higher volumes, or, frequently, discount broking is for you. It’s for this reason that day traders prefer discount traders to traditional full-service brokerages. Typically, day traders invest from a few minutes to a few hours and do not leave a position open overnight, which means timely execution of trades is essential for them. If such investors were to use a full-service brokerage, they would incur costs on commissions, maintenance fees and, fees for transferring money and so on. In contrast, if you
Know very clearly what you intend to do with your investments, such as trading, discount brokerages are for you. The focus of such brokerages is
on accuracy of data and speed of real time transactions. Another reason for the resurgence of discount brokers is the better availability of internet connection, especially on smartphones and tablets. Moreover, with the stock market gaining immensely in the past one year, several investors re
Willing to try their hands at discount trading, which is making brokerages providing such services more popular? Says Raghu Kumar, co-founder,
RKSV, with 20,000 clients of whom 8,000 are active, “We believe that if corporate governance and transparency on publicly listed companies improves, there is more scope for retail participation.” Besides, most of their clients are Internet savvy, as they place orders on their own using RKSV’s desktop and mobile apps. The present situation is a far cry from what discount brokers had experienced a decade ago when the markets were not favourable for their take off in a way as they have taken off now. On their part, discount brokers have very little, besides cost benefit, to offer to investors to draw them into using their services. Says Vijay Singhania, founder director, Trade Smart Online; “We are optimistic that this will happen with the advancement of technology in the telecom space and infrastructure development, which will give the biggest push to the industry. Of course, the overall market sentiments will play a larger role in attracting the traders to the smart platform.” Even mart retail investors are yet to move away from traditional brokerage. Says Nithin Kamath, founder & CEO, Zerodha, which has over 47,000 clients with more than 30 per cent being active: “A low cost business like ours needs scale to grow. Unfortunately, retail interest for the markets in India is still quite low with most people consumed in the real estate boom. Also, the regulatory requirements slow the process of account pening.” For investors who are evolved and looking at increasing the frequency of their trading transactions, the going gets better with several discount brokers offering them services. This is good news at a time when more than 70 per cent of the daily traded volumes in the cash market are intraday trades. Online trading (Internet trading) in India as of November 2014 for equity derivatives was 10.78 per cent of the total daily traded volumes and for cash market, 11.39 per cent of the total daily traded volumes. It is clear; there is a need for discount brokers but, it is for investors who have an active trading portfolio to maintain it. Moreover, with several retail participants coming back into the markets, at least some will evolve to increase their trading volumes and find discount broking to be more attractive than the services of a full-service broker. While investors will explore discount brokers to manage their portfolios that are far actively churned, they will also maintain their long-term portfolios with full-service brokers.
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