How to Choose a Stock Broker? How Can Discount Brokers Help in Investing?

Does your New Year's resolution include saving more or investing? Read on to find out how a stock broker, particularly a discount broker can come in handy while conducting stock market trading, or for executing investing decisions in mutual funds, equity, or commodity assets. 

 

Editor's Note: This is Part One of a two-part series on discount brokers in India. It tries to shed some light on who discount brokers are, how they are different from a traditional full-service broker and what you need to know when choosing between a discount brokerage and full-service brokerage in India.

 

A whole new decade is upon us. With most New Year resolutions including some element of saving more, investing or managing one’s finances better, lot many of us are actively raiding the internet for the best investing options out there. The search includes not just what to invest in, but also how to.

 

Enter…stock brokers.

 

Investing in mutual funds, equity or commodities? Any transaction in a stock market, buy or sell, would require a stock broker – an agent between the market and the participants/investors.  

 

Stock broker business can broadly be classified into two categories: Full-Service Brokers and Discount Brokers. 

 

 

Who Are Full-Service Brokers?

These are stock brokers who provide a full-service offering (i.e. Advice, research etc.) in addition to “executing” trades on your behalf in stocks, commodities, other asset classes.

 

These full-service brokers usually work out of offices and charge commission in percentage terms (the “brokerage”) on total amount of trade executed for the client.

 

Some popular full-service brokers in India include ICICI Direct, HDFC Securities, Sharekhan, Axis Direct and Kotak Securities.  

 

How to Choose a Stock Broker? How Can Discount Brokers Help in Investing?

 

Who Are Discount Brokers?

With the onslaught of internet, came the era of discount brokers, synonymous with online brokerages. These discount brokers carry out trades at reduced brokerage.

 

However, unlike full-service brokers, discount brokers only focus on trade “execution”, and not lay a lot of emphasis on advice, and research offerings, and hence the lower brokerage.

 

Most of these discount brokers operate through online platforms, and usually have little or no physical interaction with the clients.

 

Popular discount brokers include names like Zerodha, Upstox, Wisdom Capital, SAMCO and 5Paisa.com.

 

Now that we have gone through the basics of what a full-service broker and a discount broker do, here’s a closer look at some advantages and shortcomings of using full-service brokers:

 

Pros and Cons of Using Full-Service Brokers

What Works

Full-service brokers offer customized support and interaction in facilitating trade, managing portfolios, financial planning, and wealth management services to clients.

 

They have robust research departments with analysts that provide proprietary detailed reports and recommendations. They often have their own in-house line of products like mutual funds, portfolio management, insurance, loan services, and exchange-traded funds (ETFs).

 

Some also have investment banking divisions that may provide certain accredited investor clients access to special financial products such as initial public offerings (IPOs), senior notes, preferred stock, debt instruments, limited partnerships and various exotic and alternative investment opportunities.

 

How to Choose a Stock Broker? How Can Discount Brokers Help in Investing?

 

What Doesn't 

Customised support and interaction often comes with a high price tag – including a combination of commissions and fees.

 

Considering the high costs and perks involved, a good full-service broker may be reluctant to work with investors with a small fund pool, screening them out by requiring higher minimum investments.

 

One should also be beware of the possibility of conflicts of interest. A broker may be prompted to push for products that are more profitable to him/her than for the client. Brokers have also been known to engage in churning, wherein they encourage clients to buy and sell more often than necessary so that the brokerage can earn a commission with each transaction.

 

Next, we shall probe into the benefits and detriments of using discount brokerages.

 

Pros and Cons of Using Discount Brokers

What Works 

Lower cost is the primary benefit of using discount brokers.

 

Because they don’t offer any advice, and make money simply by buying and selling stocks, discount brokers have no vested interest in persuading a customer to buy or sell a particular stock. 

 

Moreover, discount brokers charge the same from all investors – big or small. For instance, if you buy 1 lot or 100 lots of NIFTY, Zerodha charges you flat ?20 whereas full service broker charges you as per % of volume you trade in.

 

What Doesn't

On the flip side, it would mean that the client will have no access to expert guidance or routine portfolio analysis. Discount brokers are therefore, more suited for those who are comfortable doing their own research or have adequate financial acquaintance.

 

How to Choose a Stock Broker? How Can Discount Brokers Help in Investing?

 

Key Takeaways

Not sure whom to pick?

 

If one has the requisite knowledge, time and research acumen while treading the stock market, perhaps discount brokers would be a more efficient way to go.

 

On the contrary, someone who is new to the market, and one who does not mind paying extra commission should opt for a full-service broker.

 

Conclusion

The emergence of discount online brokers coupled with the shutting down of traditional brokerages has turned the industry into a business of high volumes and wafer-thin margins, prompting several large publicly traded broking firms to expand into lending, wealth management and even insurance.

 

Needless to say, players like Zerodha are dominating the broking landscape, with more than 1.5 million clients and accounting for about 10% of the nation’s stock trades in the year ended March.

 

It is against this rising prominence of discount brokers that we shall, in the next article, be looking at some top players in India.

FIN.

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