We are all familiar with the terms brokerage and brokerage charges. It is the charge that the broker levies on the client for executing the transactions on the stock exchange. The brokerage that is charged is the major source of income for the broker. Hence brokers will charge you low brokerage if you are giving higher volumes and higher brokerage charges if you are giving lower volumes
Why is brokerage charged to my trading account?
- Any broker offers you services like executing your trades, settling your transactions, giving you trading and investment ideas etc.
- To service customers, the broker needs to maintain office, staff and computers.
- It is to cover all these costs that the broker charges brokerage.
- That is the broker’s source of revenues.
Then why does the broker also charge me STT and GST in the contract note?
- The GST, STT and stamp duty are not the income of the broker.
- The broker only collects these charges on your behalf and pays it to the government.
- Taxes like GST, STT and stamp duty are levied by the central and state governments and it is revenue for them.
Do brokers charge the same brokerage from all their clients?
- The broker has an indicative brokerage rate
- Your actual brokerage charged will be based on your relationship with the broker and the volumes traded by you.
Why is my broker charging a high brokerage for equity and low brokerage for futures?
- That is because equity trades on actual value while futures trade on notional value.
- If you buy 1500 shares of Tata Motors at Rs.400 it will cost you Rs.600,000 in the cash market. However, in the futures market you only pay a margin of say 20%. So when the brokerage on Rs.120,000 is expressed in terms of the notional value (Rs.6 lakhs), it appears that the brokerage rates on futures is very low.
Who decides the rate of brokerage on my account?
- The client agreement that you sign with your broker clearly lays out the specific brokerage rates for equities, futures and for options.
- Any change in the brokerage rates will be intimated by the broker to you in advance.
- Can you ask for a change in brokerage rates? If your actual trading volumes turns out to be much larger than you originally anticipated and you feel you are being overcharged, you can negotiate with your broker for a lower brokerage.
What is the concept of per lot brokerages that I get to hear?
- Per lot brokerage arrangement is more applicable in case of futures and options.
- F&O is traded in lot sizes that are defined from time to time.
- For example, Tata Motors is currently quoting at Rs.400 and has a lot size of 1500. The broker will fix the total brokerage for this 1 lot at about Rs.30/lot. This type of per lot brokerage is very common among brokers in futures and options.
How are some brokers able to offer near-zero brokerage?
- Discount brokers only give pure execution of trades. They do not offer research, trading calls or advisory services. Since they are predominantly net traders, they are able to sustain.
- Full service brokers provide you with reports, research, updates and timely advisory. That is why they charge higher brokerage.
I was approached by a broker with higher brokerage and assured returns
- Rate of brokerage is entirely your judgement as you need to be satisfied that the broker is giving you value for the higher brokerage.
- But you must not fall for assured returns in equity markets.
- Remember, the stock exchanges and SEBI clearly prohibit assured returns in equities and hence it is not legally permitted.
Secondly, equity being volatile instruments, it is hard to really assure returns. Hence such promises are best avoided.
How do I know the brokerage that I am being charged on my trade?
- Your broker will provide you the contract notes on a daily basis for all the trades executed.
- The contract notes clearly lays out the price of execution, the value of the trade, the rate of brokerage charged and other statutory charges.
Brokerage Options – Summing it up:
- Your brokerage rates will depend on volumes you give
- You can opt for fixed or variable rates of brokerage depending on volumes
- There is a difference between discount brokers and full service brokers
- Avoid the temptation of assured returns