How Are Brokerage Costs Calculated, And Do They Help Choose A Broker (2024)

Brokerage charges can appear complex. Even though these charges are mentioned when signing on,
many investors still need help understanding them. Whether you are a trader or an investor, you must
understand these charges and their conceptual impact on your transaction.

What Is Brokerage?

Before trading or investing in shares, you must have a trading and demat account. These accounts enable you to buy and sell shares on the stock market. The stock broking firm through which you buy and sell shares charges a fee for its service, known as the “brokerage.”

The brokerage charges by stock brokers are not fixed or regulated by any central authority. Thus, brokerage charges across multiple service providers must be uniform and consistent. The regulator has only fixed an upper limit for brokerage at 2.5% of the transaction amount.

Currently, in India, there are four different ways through which stock brokers levy brokerage charges. Let us take a look at each of them:

Flat fee for every trade

A flat fee is charged for every trade you make in this mode. Thus, irrespective of the traded value, the brokerage you must pay remains the same. However, this is subject to a condition— if the percentage brokerage is less than the lower amount, the investor pays the fee.

For example, a broker may charge a flat fee of INR 20 or 0.1% of the traded value, whichever is lower. So, if your traded value is INR 10,000, your brokerage will be INR 10 (10,000 * 0.1%), which is lower than the flat fee of INR 20. This is the most popular method of levying brokerage on trades, especially for discount brokers.

Brokerage as a percentage of the traded value

Stock brokers charge a percentage of the total trade value as brokerage. Simply put, the higher the trade value, the higher the brokerage is likely to be, and vice versa.

Monthly trading plans

A few stock brokers have come up with monthly trading plans that allow you to place an unlimited number of trades in a month, irrespective of the value of the trades. And in return, they charge a monthly or yearly subscription fee.

Zero Brokerage

Quite a few discount broking houses do not levy brokerage on delivery-based transactions.

How is Brokerage Charged for Different Transactions?

There are typically four types of transactions that can be done while trading in the stock market on which brokerage is charged, namely:

1. Equity delivery

All trades in which you hold a stock for more than a day are delivery-based trades. Brokerage is charged on the trade’s purchase and sale value. However, as you would know, many brokers do not charge for delivery-based trades. But, before you jump with joy, hold your horses; we will explain this in more detail later in the article.

2. Equity intraday

Buying and selling a particular stock on the same day is considered an intraday trade. Intraday brokerage applies to both buy and sale transactions. It can be expressed as a percentage of the transaction value or as a flat fee, for example, 0.1% of the turnover (Number of shares x price of the share) or INR 20, whichever is lower, per executed order.

3. Equity futures

You can buy stock futures (standardized contracts), and the money you make or lose in a futures transaction is credited or debited to your trading account on the same day. Here, the brokerage charges are applicable in the same way as equity intraday trades, i.e., expressed as a percentage of the transaction value or a flat fee.

4. Equity options

These trades are a significant part of the derivative market, particularly in India, and act as a tool for protecting positions and reducing risk. Usually, the brokerage charge is a fixed flat amount per order or lot. The brokerage charges for the above transactions differ from broker to broker.

Apart from the brokerage charge, there are additional charges mandated by the law, exchange, or regulatory authority — mentioned below:

Source: Zerodha

Security Transaction Charges (STT): Taxed by the government on the value of the transaction when transacting on the exchanges.

SEBI (Securities and Exchange Board) Charges: Charges are made by the Securities and Exchange Board of India to regulate the markets.

Goods and Service Tax (GST): Tax levied by the government on the services rendered.

Stamp charges: Charged by the Government of India as per the Indian Stamp Act of 1899 for transacting in instruments on the stock exchanges and depositories.

Transaction charges: Charged by exchanges (NSE, BSE, MCX) on the value of your transactions.

How Is Brokerage Fee Calculated?

The charges (like those mentioned above) apply regardless of which type of broker you choose, including full-service or discount broker (we will discuss the difference between them in the latter part of the article). The only distinguishing factor across different brokers is the brokerage charged on other transactions.

Now let us understand how brokerage is calculated with the example of an equity delivery transaction:

Consider brokerage charges for equity delivery on buy and sale, which is INR 0.1% of the traded value.

When you take equity delivery, you are a buy-and-hold investor (often also called a passive investor) looking to hold stocks for the long term. Buy-and-hold investors are happy to wait for a longer time to see the value of their investments appreciate because they are essentially investing in stocks to generate returns of at least 20% plus.

Assume that on Aug. 25, 2022, you bought 100 shares of Reliance Industries at INR 1,000 per share for the long term. The total buy value is INR 1,00,000 (100 x 1,000). We then add the total buy value with a brokerage fee of INR 100 (0.1% x INR 1,00,000). We add GST at 18% on INR 100, which is INR 18. Adding all charges, INR 1,00,118 will be debited from your trading account.

However, after two years of holding the shares, you decide to sell them on Aug. 25, 2024, at the current market price of INR 1,800. This means INR 1,80,000 less brokerage of INR 180 (0.1% x 1,00,000) plus 18% GST (INR 32.40), which equals INR 1,79,787.60, will be credited to your trading account.

Therefore, the profit earned on holding Reliance Industries for two years is INR 80,000, and the brokerage charged on the total traded value is INR 330.40 (INR 118 on buy + INR 212.40 on sale transaction).

You can see that by staying invested for two years, you generated an absolute return of 80%, i.e., a profit of INR 80,000 on INR 1 lakh invested, of which 0.41%, i.e., INR 330.40 was charged one time as brokerage (including GST).

Furthermore, let’s assume the stock price moved up by INR 200 to INR 1,200. Now, you earned an absolute return of 20%. Even then, the one-time brokerage (including GST) charged on the entire trade will be INR 259.60, which is just 1.3% of your profit.

You will notice that the higher the profit, the lesser the brokerage impact. However, it is a minimal cost compared to the profit earned, and service availed over the holding period. Thus, brokerage is negligible if you are an investor, and this should not be a deciding factor if you are a long-term investor.

Other Differentiating Factors and Why Brokers Offer Zero Brokerage

New-age and fintech brokerage houses have been stressing “zero brokerage” as their unique selling point, and many of us are allured by this without even practically understanding its impact on the trade we make.

Before choosing a broker offering “zero brokerage,” we must understand that most such companies fall under “discount brokers.” They are most known for providing you with a trading platform. Many do not offer certain services ranging from investment advice, research reports, assisted trading, etc., supplied by full-service brokers. For instance, some services like “Call and Trade,” wherein you can place the transaction just over a call, are chargeable when availed via a discount broker, and full-service brokers may offer these free of cost.

So, when you choose a discount broker, you are expected to have full knowledge of the stock market to make informed and research-backed trade decisions. This is the primary reason discount brokers can keep operational costs low and offer slightly lower brokerage costs than full-service brokers.

Discount brokers offer “zero brokerage” on equity delivery while keeping brokerage for the rest of trade transactions. This is similar to full-service brokers because the volume of equity delivery trades is minuscule compared to futures and options trades.

Let’s look at this data for Aug. 2022:

The data reveals equity delivery trades form 0.43% of the total market turnover, while about 99% of volumes come from options trading. There is a chance that you may initially get carried away with zero brokerage on delivery. You might pay a higher brokerage when trading futures and options. Around 75% of the equity market segment comprises intra-day trades.

Further, in intra-day trading options, full-service brokers often charge a flat fee per-lot basis, while discount brokers charge it based on every executed order. Here’s why it matters:

Let us understand its impact with an example: A full-service broker charges INR 18 per lot, and a discount broker charges INR 20 per executed order. Accordingly, if you buy two lots, the complete service broker will charge INR 36 (18 x 2), whereas the discount broker will charge INR 20 since this transaction is considered a single order. However, if you buy one lot, the complete service broker will charge INR 18 (18 x 1), while the discount broker will charge INR 20.

Additionally, it is essential that you first decide whether you are going to be a retail investor or an intraday trader. Discount brokers charge INR 20 on buy and sale transactions when you do intraday option trades. This totals to INR 40. The full-service broker will charge INR 18 only once for the entire transaction.

Thus, you are responsible for deciding which broker to use based on your preferences and how you will transact.

When are Brokerage Costs Relevant?

If you are a trader, you often trade in the market to make quick gains that are more significant than the market average based on short-term price volatility. Thus, you might enter and exit positions frequently over a short period. So here, brokerage may form a significant part of your transaction cost and should be accounted for while making a trade, as it could take a big bite out of your returns.

However, it is to be noted that the charges are nearly the same for all brokers and could be negotiated as the brokerage charged by stock brokers is not regulated by a central authority. It is essential to determine which segment you will be active in. If you undertake more futures and intra-day trades, looking at delivery brokerage has no meaning. The same is the case with traders who will predominantly trade in Options; they need to look at what they would pay for the Options contract as brokerage.

Bottom Line

It is of utmost importance that when you open a trading account, you look at the comprehensive picture of the brokerage charges. Your investment style should also influence your choice of broker, whether you’re a seasoned trader or retail investor; an investor should not ignore the services the broker offers.