How to spot your brokerage house
Vikram Srivastava / Mumbai September 29, 2003
Brokerage rates vary quite a bit for various categories of investors. Fixed rate brokerages are better for retail investors, but those planning to trade high volumes can opt for variable rates The recent rally in the markets has attracted even the normally risk-averse retail investor back to equities. While the idea is to make big money by investing in stocks, people intending to trade regularly during this bull run would do well to look at the "small money" they have to spend in the process of buying and selling. Things like brokerage charges, demat charges, transactions charges and the like. Let's be clear and upfront: There is no one correct answer to questions such as who offers the lowest brokerage rates or demat charges. The problem is that different charges come bundled or unbundled with different riders, and what's cheap for one investor may not be so for another. Brokers - whether online or offline - try to attract investors through various means. While some seem to prefer offering lower charges for people who trade more, others offer the simplicity of fixed rates to avoid confusing the investor. Which one makes sense to you depends on what kind of investor you are. Online or offline? So how do you choose the right broker? The first choice you need to make is whether to go for someone who allows you to trade online, or prefers to deal with you on the telephone or at his office. While brokerage houses like Prabhudas Lilladher and Motilal Oswal still hold fort among traditional trading houses, the availability of many online brokerages like ICICIdirect, HDFC Securities, Indiabulls and IL&FS Investsmart has widened options. There are advantages to trading with flesh-and-blood brokers and cyberbrokers. For example, net-based brokerages offer the advantage of giving you share quotes right on your computer with minimal time-lags. Though you could do the same with your traditional broker over the phone, control is in your hands and you actually see the quotes on your screen. Moreover, there is the advantage of completing the entire transaction - from buying or selling to payment or receipt of shares or money - without moving out of your home. The contract notes are mailed to your home. Some online brokers like ICICIdirect and HDFC Securities offer both screen-based trading and telephone trading. The offline enthusiasts, however, have their own advantages. Unlike the online players, you can talk to real brokers and get their feedback on what's happening in the markets. If you have had a sufficiently long relationship with the broker, they may even offer you tips about market moods and how to profit from them. Brokers like Motilal Oswal offer portfolio management services for investors with at least around Rs 50 lakh in the kitty. Brokerage costs Once you have decided whether to trade with an online broker or an offline one, you have to start looking at costs - that is, brokerage. The brokerage charged by firms varies depending on various factors. ICICIdirect and Investsmart have a variable structure where the brokerage charged depends on the quantum of trading done in a quarter. For Refco and HDFC Securities, however, the brokerage remains the same irrespective of the traded quantity. Traders who wish to square off their trades within a trading cycle are offered incentives. ICICIdirect does not charge brokerage for the second leg of a transaction - that is, if you buy and square off within the same settlement cycle - effectively halving the brokerage charged. Since its basic brokerage rate is 0.85 per cent, the rate for squared off deals comes to 0.425 per cent. If you are a high volumes trader, the effective rates for ICICIdirect can fall as low as 0.3-0.4 per cent for non-delivery and delivery trades. HDFC Securities charges a flat 0.5 per cent for delivery-based trades; it incentivises squaring off trades in the same settlement cycle by offering a lower rate of 0.15 per cent for each leg of the transaction; so that makes 0.3 per cent in all. Other brokers have similar deals for various kinds of clients.
Broadly speaking, people with low trading volumes may benefit from brokerage houses that charge a flat rate rather than a variable rate. People who trade in large quantities may, on the other hand, benefit from brokers like ICICIdirect and Investsmart. But looking at overall brokerage rates tells only half the story. What investors need to look at is the overall cost of trading, and not merely the brokerage. For example, many brokers add demat charges or service tax or other charges, which is over and above the low brokerage. So the cheapest brokerage may not necessarily be really cheaper than one that looks high at first glance. ICICIdirect says its brokerage charges are all-inclusive, except for an annual maintenance charge of Rs 300 for an ICICI demat account. Motilal Oswal, on the other hand, has no demat transaction charge. However, the firm's annual maintenance charge are a bit stiffer. Prabhudas Lilladher, on the other hand, levies low demat account maintenance charges and levies transaction charges only on the sale of shares in the demat account. Demat charges The main costs outside brokerage relate to custodian charges and demat transactions. While there are special charges for those who hold physical shares and want to convert them to the demat form (the rates vary from Rs 12 per certificate for ICICIdirect to Rs 28 for Refco Sify), these are one-off costs. But custodian and transaction charges for shares held in the demat format are recurring ones and hence need some scrutiny. The custodian charge is the cost of keeping shares in the demat account. This charge is levied on a per-month basis and varies from Rs 0.75 per ISIN number (that is any company, no matter how many shares are held) for ICICIdirect to Rs 1.25 for Indiabulls and Kotak Street. Some brokerage houses like Prabhudas Lilladher and Motilal Oswal do not charge any custodian fee. Transaction charges for dematerialised shares range from 0.02 per cent to 0.04 per cent. This may seem low. But one should also look at the minimum charge brokerage houses levy, which varies from Rs 20 for ICICIdirect to Rs 10 for Refco. Motilal Oswal has waived transaction charges on purchase of shares in the demat format.