- Date : 11/09/2020
- Read: 6 mins
If you are looking to supplement your income by diverting resources to the stock market during the lockdown, it is vital that you know about discount brokers.
With most people staying at home due to the prolonged pandemic, millions across the globe are looking to maximise their free time and supplement their income by investing in the stock market. Cheaper valuations and consistent volatility have attracted long-term investors and day traders alike. In India, as many as 1.2 million trading accounts were opened during March–April 2020 alone!
A majority of these new customers are relying on discount brokers for their trading needs. Business for discount brokers has been growing exponentially thanks to their user-friendly digital interface – and more importantly, affordable transaction charges. Here is a low-down of everything you need to about these new-age stock broking services.
What is discount broking?
Discount brokers offer trading services at a very low commission as compared to traditional brokers. Most discount brokers in India charge a flat fee of Rs 10–20 per trade, while full-service brokers charge a percentage fee ranging from 0.40% to 0.75% on the value of each transaction. This translates into significant savings for all types of investors.
Discount brokers are able to operate on wafer-thin margins since they offer a ‘no-frills’ service. They focus purely on the core transactional service and usually do not have an advisory arm of highly paid research analysts and relationship managers. They have also done away with physical branches and sub-broker commissions, thereby saving on infrastructure and manpower costs. As a result, they are able to pass on the savings to their customers by way of reduced commission charges.
How do discount brokers operate?
Discount brokers operate on a technology-driven business model. They invest in advanced fintech platforms that deliver a speedy and smooth trading experience. While some discount brokers offer both web- and app-based services, most deliver their services by means of step-by-step, click-and-use apps that in a way gamify trading.
Robust technological deployment and low operating costs allow broking firms to remain profitable.
How do discount brokers differ from full-service brokers?
While the commission charged is the biggest differentiator, there are some other service aspects too that vary between the two types of brokerage service providers.
Service bouquet: Full-service brokerage houses offer a wide range of services. They provide advisory services, research reports, portfolio management, wealth management services, and even tax advisory.
Discount brokers, on the other hand, simply offer a trading platform and let the customers manage the portfolio by themselves. While the service is primarily targeted towards self-directed traders and investors, informative blog posts and video tutorials make it easy for novice investors to quickly learn the ropes of basic trading.
Market updates: Full-service brokers regularly push updates via mail and SMS regarding investment calls. Depending on your relationship value, they may even allocate a relationship manager who understands your investment needs and advises you along the way.
Discount brokers, however, refrain from adding on these ancillary marketing and advisory costs. The wealth of information in the public domain is enough for active investors to make informed decisions regarding their portfolio.
Network and support: Full-service brokers have a chain of branches across cities that they operate in. In places with no branch, they appoint sub-brokers who operate on behalf of the brand. These branches are available for offline trading as well, and provide in-person customer support.
Discount brokers operate on a completely online model. Your documentation and KYC verification happen through an app. Their customer support teams are extremely lean as well, with AI and machine learning integrated chatbots offering 24x7 customer support.
Which of the two is more suitable?
Making the choice between a discount broker and a full-service one depends primarily on two factors: (a) your knowledge and understanding of the financial markets, and (b) the level of personalised service you will need.
If you are an experienced investor or have the requisite market knowledge, you may not have much use for the value-added services a traditional broker offers. In such a scenario, opting for a discount broker can boost profitability. On the other hand, if you are new to equity investing, having recourse to professional advice can help minimise investing mistakes. You can leverage expert opinion and build your portfolio safely.
The level of service quality is the other factor. If you think you will not be able to stay on top of your investments at all times, a full-service broker is the way to go. They will be able to provide assistance and services such as branch servicing, doorstep servicing, fund transfer and buy/sell assistance, portfolio tracking, regular advisory, as well as assigning you a dedicated relationship manager.
So, before choosing one of the two, you will need to do a cost-benefit analysis based on your investing patterns and service needs.
What should one keep in mind when selecting a discount broker?
Those looking for a discount broker need to assess their options based on these three parameters:
- Trading platform: The user interface should be easy to use, fast, and glitch-free. Stock prices change by the second, so even a minor lag can cost investors heavily. Before you open an account, request for a software demo to check your comfort level.
- Brand credibility: Ensure that the broker is registered with SEBI and stock exchanges such as NSE and BSE. They need to have in place secure systems with multi-level verification and strong risk management processes. Look for a broker who has been active for at least a couple of years and executed a large volume of trades.
- Customer support: Customer support is a critical factor while choosing a discount broker. You may need assistance at various points during your trading journey. Timely and knowledgeable customer support can help resolve issues effectively and create a positive environment for continued patronage.
Discount brokers are popular, especially among new investors. There are numerous customer reviews and feedback available on various online forums. These user experiences should help you make an informed choice on which broker to choose as you start your investment journey. Clueless about investing in stock markets? Here are some options to get started.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.