When you are trading in shares, there are many fees associated with it. They include Security Transaction Tax (STT), service tax, stamp duty, brokerage charge, and various others. Amongst different costs, the brokerage charge and STT are the most common ones. Brokers are the agents who aid us in buying and selling shares, futures, options and different financial instruments. In exchange for the services a broker offers, he or she charges a fee, which is called brokerage. There are two types of brokers, and the brokerage charge depends on the kind of broker you choose.
Types of Brokers
Based on the services offered, brokers can be of two types –
Full-service brokers: These are traditional brokers, and their services include assistance with trading in stocks, currency, and commodities. They do the research for you, manage your sales and assets and provide you with expert advice. They also provide you with assets for banking. The charges of full-service brokers range from 0.01% to 0.50% on both intraday and delivery trading.
Discount Brokers: Discount brokers offer a highly efficient execution platform which you can use to trade in stocks and commodities. Their charges are lower, and they do not provide any investment advice. These brokers charge a fixed fee per trade (a flat fee of Rs 10 or Rs 20) in the case of intraday and delivery trading. Some of these brokers do not have any charges for delivery trading.
In India, there are 3 varieties of brokerage plans that are offered-
- Brokerage-based on a Percentage of Trading Volume
- A flat brokerage that is charged per trade
- Monthly Trading Plan that is unlimited
Understanding Brokerage Charges
You should remember that a brokerage charge has to be paid both during the buying and the selling of a share. You might find some brokers who are exceptions to this, in that they charge fee only once, for either the buying or selling.
If you are wondering how to calculate brokerage in share market, this example will make it easier to understand.
Suppose a broker charges a fee of 0.05% on intraday trading. This means-
Brokerage charge is 0.05% of the total turnover. Suppose the stock you buy costs Rs 100. Then the brokerage charge is 0.05% of Rs 100, which is Rs 0.05. Then, the total brokerage charge on the trading is Rs 0.05+ 0.05, which is Rs 0.10 (for buying and selling).
The brokerage is calculated on the total cost of the shares at the percentage that has been decided upon. So, the formula for the brokerage is as follows.
If the charges is .05% for intraday and .50% on delivery, then-
- Intraday brokerage=Market price of 1 share * number of shares * 0.05%
- Delivery brokerage=Market price of 1 share * number of shares * 0.50%
As competition levels amongst brokers are increasing, the charges are becoming more affordable.
After you have finally selected a broker, you should ensure that the brokerage he applies on your transactions matches the offer you both agreed on. You also need to check the brokerage that is applied on periodic intervals.
An amount that is classified as ‘Annual maintenance charges’ is deducted by the broker from your account. Enquire about these charges too. If the AMC charge is deducted every month that deducts a sizeable portion of the fund you invested. In that case, it is better to pay a bulk amount at the beginning, and having the monthly AMC charges nullified. On an average, the lumpsum amount figure hovers around a one-time payment of Rs 500 – 750.
The rate of brokerage that is effectively charged is different from the percentages mentioned above. Besides brokerage, there are other related charges that you also need to consider.
The net trading cost is computed using this formula-
Trading cost = Brokerage + Securities transaction tax + Stamp duty + other charges
Numerous broker firms are available to traders now, so the options you have are quite a few. The brokerage charged by a broker is a major source of income for a broker. So, to attract traders, brokers offer lower brokerage if you give them higher volumes of shares, and a higher charge if you offer lower volumes. Intraday brokerage charges are generally lower than delivery charges. So, look into the charges various brokers offer, and choose one today!