Zero Brokerage Vs. Traditional Brokerage: A Comparative Analysis of Both Models

Since you’ve already learnt the basics of stock trading in previous posts, we shall introduce you to a brand new concept that goes by the name of “Zero Brokerage”. It’s a new buzz word you may have heard on finance news. Concluding it down to a single line, ‘Zero Brokerage’ is the perfect solution for dealing with the complexities of brokerage and investments. About a year back, had you asked any brokerage firm if this was possible, they would’ve said a big fat “no”. Nevertheless, innovations in stock market and trading patterns have made this possibility real today.

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To understand how zero brokerage firms work, you’ll have to understand the functioning of traditional brokerage model.

# Traditional Brokerage Model:
Giving shape To Stocks and Shares Since Last 50 Years:

In order to invest in stock and shares earlier, investors approached individual stock brokers large brokerage firms that charged a hefty sum on trading. Brokerage firms naturally provided all finance solutions including equity, derivatives, currency, commodity, future and options (F&O), mutual fund, insurance, fixed income funds, retirement funds, depository, IPO and market research. Brokers approached corporations, did research and provided advice, hence the high fees. 

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Rates charged by traditional brokerage firms can be explained with the following example—

Suppose you buy 2 lots of MRF (most expensive share listed by NSE and BSE), your broker will charge you twice as much the price of one share). Brokerage fee was around 0.25 to 0.5% for retail investors and approximately 0.1% for individuals with high net-worth.

Although it was fruitful for the brokers (since they were the ones handling important issues), yet it doesn’t make sense for customers to pay a large sum out of their fortune, just like this. So, to provide profits mutually to both the parties, traditional brokerage system was replaced by online trading. The added advantage was, there were trading software, brokerage calculator and online trading apps to help customers execute bulk orders.

The Zero Brokerage Model was an added benefit to online trading.

# The Zero Brokerage Model: Example of Creativity at Its Best! 

This model basically exists to cut costs on brokerage by eliminating broker’s hefty share per executed order. It reduces costs and helps you save money in either of the aforementioned ways:

1)      Making equity delivery trades or equity trading absolutely free (which attracts most investors)

2)      By charging a flat fee per executed orders on Futures and Options (F&O), Commodities and Equity executed intraday orders.

This flat fee is a small amount applicable across all exchanges. Even though other charges (like transaction charge, exchange charge, service tax and statutory taxes) are levied on orders, reduction of brokerage fee on the whole makes relieves customer’s pocket.

How is It Savvy?

The Zero Brokerage model imposed on online trading ensures no or a small flat fee is charged per trade, irrespective of the type/size of underlying securities and transaction volume. In short, if your brokerage firm charges Rs. 20/- per trade and you’re buying or selling two stocks per day, you end up paying Rs. 40/- on transactions, which is quite cheap.

Charges are fixed on derivative orders since their size restrictions (minimum lot size should be around Rs. 2 lakhs) and lower ticket transaction costs you either flat fee or 0.01 to 0.05% per order (whichever is lower).

In a Nutshell…

Introduction of zero brokerage model means we save more and pay less. Since ‘money saved is money earned’, you end up being happier and richer!