If you want to trade in the Indian stock market, you would have to do it through a broker. Whether you are a small or a wealthy investor you have to have a broker to trade on your behalf. Some decades back the #brokerage fee that the brokers were charging was so high that it almost made it impossible for the small investors to trade for profit. For example, if you were a salaried person thinking of parking a part of your monthly savings in the stock market, then it wouldn’t have been a very profitable experience for you, because of the brokerage you had to pay.
But, thanks to the technological advancements, there has been a generous change in the way the market functions. With the internet boom in the country, several brokers went online, thereby reducing their overhead costs. A discount broker is a term that usually refers to online brokers. On the other hand, full-service brokers often referred to as traditional brokers are more involved with their clients, providing financial research and advice; hence the hefty fee. On the contrary, discount brokers, only carry out the trade on behalf of their clients. There are several pros and cons of both sides that we shall get into detail in this ‘#Discount Brokers Vs Full Service Brokers in India’ article.
Full-Service Brokers Explained
As I have already mentioned before, full-service brokers are licensed financial brokers who provide several services to their clients like, market research based financial advice; tax tips, and even financial planning, etc. Of course, it all comes at a good price that they charge as their brokerage.
A full-service broker handles your portfolio on your behalf as your personal financial management so that you need not worry about it. It is like hiring a personal wealth manager who takes care of all your financial goals. Almost all of the full-service brokers provide online trading platform to their clients that helps them by providing technical analysis and order execution.
Traditional brokers in India charge a hefty trade fee, which is one of their main disadvantages. For example, HDFC Securities a full-service broker charges 0.50% brokerage on equity delivery as well as an account opening fee of Rs 999. Some other full-time brokers in the Indian market are – #ICICI Direct, #Sharekhan, #AxisDirect, and #Angel Broking among others.
Traditional or Full-Service Brokers Key Takeaways –
- Provide a wide range of financial services and advice to the clients.
- Portfolio analysis, tax planning, IPO Shares, overseas market, etc.
- Service investors with big investment capacity.
- Have physical branches present all over the country.
- Provide both offline and online services to their clients.
- Been in the market for a long; therefore, they are more suitable for traditional traders.
Discount Brokers Explained
Unlike the full-time brokers, discount brokers do not provide any financial advice or research analysis to their clients; they just carry out buy and sell orders on their behalf. Also, the brokerage that the discount brokers charge from their clients is very low as compared to the full service or traditional brokers.
Discount brokers just execute the trade on their client’s behalf, that’s it. No consultation, advice, or any other financial service is given. Discount brokers don’t have the burden of finalizing the deal with high net worth individuals that requires a full-time engagement; on top of that, they operate online-only, reducing their overhead costs considerably.
They provide an electronic trading platform with charting and positioning services to self-directed traders. There is no one to one interaction between the client and trader, if there is, it is only regarding the trade execution.
The brokerage fee that discount brokers in India charge are around 60% lower than the brokerage charged by the full-service traditional brokers. Several discount brokers like Zerodha and Upstox even offer zero brokerage equity delivery trading and mutual fund. However, for other segments, there is a very minimal fee of Rs 20 per trade irrespective of the trade size.
Discount Brokers Key Takeaways –
- Provide no analysis or advice to the clients, but only with the execution of the trade.
- Suitable for small investors with small portfolios.
- Charge very low commission as compared to full-service brokers.
- Usually, charge Rs 20 per trade.
- No physical branches present but only online service is provided.
Difference between a discount broker and full-service broker
The table below narrates the main differences between discount and full-service brokers with examples in both the segments.
| POINT OF INTEREST | FULL-SERVICE BROKERS | DISCOUNT BROKERS |
| Brokerage | Hefty brokerage fee depending on the size of the trade (typically between 0.3% to 0.7% per trade) | Flat Rs 20 per trade, irrespective of the trade size |
| Main service | Providing trading platform along with advice | Only to provide trading platform |
| Research and advice | Dedicated research department to advice the clients on financial matters and portfolio | No such service is provided and the client completely invests on his own risk what so ever |
| Presence | Physical offices and online presence | Only online presence |
| Customer service | The option of face to face customer service available | Online customer service limited only to transaction matters |
| Additional Services | Research reports, recommendations, tax matters, etc | Services only limited to trading |
| Other services | Commodities, currencies, FOREX, IPOs, FDs, Bonds, Mutual Funds, insurance, etc | Only current commodities, stocks, and current trading |
| Suitability | Suitable for big investors who can’t afford losses and need expert advice | Suitable for small investors who can’t pay a chunk of their returns as the brokerage fee |
| Accounts | 3 in 1 account i.e. Savings, Demat, and trading is available | Only Demat account is available |
| Examples | Sharekhan, KOTAK Securities, ICICI Direct, Motilal Oswal, Edelweiss, Aditya Birla Money, etc | Zerodha, RKSV, SAS Online, Trade Smart Online, etc |
Pros and Cons of discount and full-service brokers
Both kinds of brokers have their own pros and cons. While a full-service broker might suit the requirements of heavy investors it might not be the right choice for small investors. In this section, we will briefly go through the pros and cons of both kinds of brokers.
Full Service Brokers Pros and Cons
| PROs | CONs | |
| Full-Service Brokers | Committed service | Services come at very high transaction cost compared to a discounted broker |
| Saves lots of time for the clients | Usually have a minimum investment limit that keeps them out of reach for the small investors | |
| Customized financial plan | A possibility of a conflict of interest exists when the broker prefers accumulating brokerage than working in the client’s interest | |
| Churning – A process when the broker falsely encourage clients to buy and sell more often so that they could make more money through brokerage |
Discount Brokers Pros and Cons
| Discount Brokers | PROs | CONs |
| Low brokerage fee | No personal advice or research information | |
| Unbiased service as they don’t have vested interest in buying and selling of a particular stock | While the discount brokers might boast about the low commission, there may be some hidden fees which need to be checked | |
| Even many discounted brokers offer tutorials on their websites for the investors. | Usually, the margin earned is low as there is no professional advice |
Should you choose a discount broker or a full-service broker?
Well, the answer to that question depends on several factors like – how much are you willing to invest; how much time do you have; what is your risk factor; how much loss can you bear; etc.
If you are a trader looking to invest a big amount then you should choose a full service or traditional broker. Going with a discount broker would be too risky for you and you might lose your money in absence of expert financial advice. You just have to let your broker work in the best interest of your wealth in exchange for a commission.
On the other hand, if you are new to the stock market or just want to regularly invest small chunks of your savings into the stock market, for better returns; a discount broker would just be a blessing in disguise for you. Many discount brokers offer sufficient tutorial materials on their websites that will gear you up for a new solo investment journey. It’s not that only new and small traders choose discounted brokers but it is also the choice of fairly decent investors, salaried professionals who don’t like the idea of sharing their profits with full-service brokers.
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