Still paying your Stock Broker for unused services_ Be smart, Meet the Discount Broker - The Economic Times canadian business brokers

Still paying your Stock Broker for unused services_ Be smart, Meet the Discount Broker – The Economic Times canadian business brokers

Imagine, you wanted to buy a hatchback car for your family and walked into an automobile showroom with a tight budget of rs. 5 lakhs and the only car that the salesman offered to you was a full-loaded top end variant at rs. 6.5 lakhs. You knew for a fact that you din’t need to buy the features of keyless entry, CD changer, bluetooth connectivity, touch screen, multi-functional steering and could do away with these and buy the car in your budget. As a matter of fact, you could go to a local garage and buy these at probably 1/3rd the cost the automobile company was offering you. Fortunately for you, now the automobile industry has an unbundled pricing structure and almost all major companies offer 3-4 different variants starting from a base model and then offering incremental features in every higher variant.Canadian business brokers

Stock brokers in india typically charge a brokerage of 0.3%-0.5% on delivery transactions. How was this number of 0.3% to 0.5% derived? Typically, brokerage services comprise of 3 major costs – the cost of execution, the cost of advice and the cost of funds.

It is interesting to note that the only cost that actually is a percentage cost for brokerages is the cost of funds and it is the only cost directly proportionate to the size of the trade. If a transaction is large, the working capital blocked is large and correspondingly the cost is higher. However, the cost of execution and the cost of advice have no relationship with the size of a transaction. The salary of a stock dealer or research analyst will remain the same irrespective of the size of transaction being placed by the customer.Canadian business brokers despite of the fact that 2 of the 3 costs being absolute, brokerages charge percentage rates since that bundles pricing and obviously results in better realisation from the consumer for the broker.

Let’s take an example of an independent investor or trader desiring to buy stock worth rs. 1,00,000. If he/she put up his/her entire funds on T day (even though brokerages settle transactions with the exchanges on T+2) and also din’t take any research/advice from the broker, he/she would still be charged the fixed percentage brokerage rate of 0.5% and would have to pay rs. 500 on each side of the transaction. The consumer would end up paying the full price even if he/she din’t actually consume all the services of the broker.

The current pricing structure of the brokerage industry is that of bundled pricing.Canadian business brokers however, there are several problems with this structure – lack of transparency, excessive pricing and no option to the consumer to cut his costs by doing away with services not being consumed.

Discount broking has picked up as a segment in india with brokerages offering execution services only on a flat fee model. The number of discount brokers in india is up from single digit to now 20-30. However, the industry is stuck at offering a base model only. Consumers have the option to transact online by opting for a pay-per trade model, however that’s a complete no frills model. No demat services, advisory services or working capital being blocked by the broker. In the above example, the investor/trader desiring to buy rs. 1,00,000 worth of shares would have to pay up the entire rs. 1,00,000 on T day (and not T+2) and pay a brokerage of only rs. 20 for the transaction.Canadian business brokers the problem with discount brokers in india is absolute lack of flexibility. Imagine a monday when the markets were down by 5% and you had rs. 50,000 in your trading account and desired to buy stock worth rs. 1,00,000 with a commitment to pay off the balance rs. 50,000 by the settlement day wednesday (T+2), it would not be possible to do so with a discount brokerage in india. You could only buy stock worth rs. 50,000. Now imagine, that you got lucky and the stock was up by 5% the following day – that would mean a notional opportunity loss of rs. 2,500 (50,000 * 5%), far more than the savings in brokerage with a discount broker.

What the brokerage industry in india really needs is a combination of the discount brokerage and traditional brokerage model – the low cost savings of a discount brokerage and the flexibility and service range of a full service broker.Canadian business brokers while discount broking appears to be the future, discount brokers in india need to offer a no frills base model and then higher variants with incremental features at higher pricing. The power of picking and choosing the services needs to be put in the hands of the consumer.

SAMCO, which is co-promoted by legendary cricketer kapil dev is pioneering the unbundling of pricing structure of the brokerage industry akin to automobiles with the launch of its cashplus offering. Its base model no-frills discount broking service offers trading at flat rs. 20 per transaction – irrespective of the exchange, segment or size of the transaction. It now also offers customers the flexibility of buying more shares than for the amount lying in their trading account unlike the current discount broking industry practise.Canadian business brokers taking our above example, you could buy shares of rs. 1,00,000 on monday even though you only had rs. 50,000 in your trading account with SAMCO. You could fulfill your balance obligation later and thereby never miss out on an opportunity. You would be required to pay an interest of only 0.05% per day of delay on the outstanding amount. According to jimeet modi, CEO, SAMCO, the savings of transacting with SAMCO’s unbundled pricing could go up 91% of existing brokerage costs.

Commenting on the product, modi added that an era of complete unbundling of services has began and customers will have the power to choose what they want. Discount brokers till date were restricted to pure execution services only and were unable to complete the entire service offering demanded by the customers.Canadian business brokers with our cashplus product customers can now keep their costs practically negligible with complete freedom to pick and choose from an array of services that includes trading, funding, research and advisory.

The trend in the broking industry clearly seems to be shifting from the full service brokers to discount brokers. However, it will still take a few years before the complete unbundling of services takes place. Till then, when consumers decide who to trade with, they should consider the flexibility of a full service broker vis-à-vis the cost advantage of a discount broker.

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