We often receive a question about higher brokerage being charged on orders of small value. Here is an explanation as to why this happens. This is a standard practice across the industry.
All major stock brokers will charge a minimum brokerage per trade.
Lets take the example of a stock broker whose standard plan levies a brokerage of 0.30 paise per delivery order. Typically such a broker would charge a minimum brokerage on each trade such as – Minimum Brokerage of Rs. 25 or Rs. 35 (including service tax and STT).
Put differently, a client will at minimum pay Rs. 25 as brokerage irrespective of his trade amount. Let’ see how this impacts a client.
Client A buys 1 Share of Unitech @ Rs 8.
Trade Value = Rs. 8
Brokerage = Rs. 25 (and not Rs. 0.024 i.e. 0.30% of Rs 8)
For a small purchase of Rs 8, the client would end up paying Rs. 25 as brokerage, that’s more than 300% brokerage on trade value!
Client A buys 10,000 Share of Unitech @ Rs 8/ per share.
Trade value = Rs. 80,000
Brokerage = Rs. 240 (0.30% of Rs 80,000)
In the above scenario, where a broker charges a minimum of Rs. 25 per trade as brokerage
EFFECTIVELY THE CLIENT’S REAL BROKERAGE PLAN OF 0.30 PAISE PER DELIVERY ORDER WILL KICK IN ONLY ON ORDERS WHERE THE TRADE VALUE CROSSES A MINIMUM OF Rs. 8,333/- (i.e. 0.30% of 8,333 = Rs. 25).
Why Do Brokers Charge a Minimum Brokerage Per Trade?
Irrespective of the trade value, stock brokers must generate electronic (or paper based) bills. Additionally, thier staff must answer client queries relating to each trade in case such queries arise. To maintain the paraphernalia needed to carry on the business of stock broking, minimum brokerage per trade has become market standard for all brokers. In fact, some deep discount brokers now work entirely on this model. They will charge you Rs. 25 per trade, irrespective of the trade value.
Note: The above will have no impact on brokerage levied on larger value orders.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities