How to Calculate Brokerage in Share Market
If you have traded or invested in the share market, you might be familiar with the brokerage levied on your transactions. Buying or selling securities, whether for trading or investment purpose, attracts different charges like brokerage, SEBI charges, GST, etc. Traders or investors are profitable in their endeavor if the profit generated surpasses the cost of all such additional fees and charges.
Recently, there has been a rise in the number of stockbrokers, of both foreign and domestic origin, operating in the Indian market. This has led to brokerage firms overhauling their business models. As a result, several stockbrokers are now charging a flat brokerage fee to reduce the cost of trading for users.
In this article, we will analyze what a stockbroker is and its different types. We will understand brokerage charges levied by the brokerage firms and the things to be mindful of in these charges.
What is a stockbroker and its types?
A stockbroker is an intermediary that facilitates transactions in the financial market. These firms, combined with the stock exchanges, depositories, clearing houses, etc., are necessary for the smooth functioning of the financial market. These firms charge brokerage for the services they provide. Depending upon the type of services they provide, stockbrokers can be classified into:
- Full-Service Brokers in addition to acting as an intermediary in the financial market, also provide other services like investment advisory, investment research, etc. A dedicated relationship manager is assigned by the stockbroker for each user. The fees charged, as a result, is higher than the discount brokerage firms.
- Discount Brokers provide the basic platform to facilitate buy and sell transactions in the stock market. Since these firms do not offer comprehensive research, advisory and dedicated Relationships Managers, the brokerage fee is considerably lower than that of a full-service broker.
You need a Demat and Trading Account to access the share market online. You can consider discount brokers to save on brokerage costs. Bajaj Financial Securities Ltd (BFSL) is one of the leading names in the discount broking space which offers low brokerage trading.
What are Stock Market Brokerage Charges?
Brokers charge brokerage when you buy or sell shares on their platform. A brokerage charge is necessary for the stockbrokers to fund their operations.
The brokerage charged depends on the type of broker: full-service or discount broker. A full-service broker provides additional services than a discount broker and therefore charges a higher brokerage charge. While a discount broker offers only the platform to trade or invest in and no additional services like personalized investment advisory; hence charges a lower brokerage.
However, the maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations which should not exceed 2.5% of the total value of the transaction done by the client, hence, a broker cannot charge more than 2.5% brokerage from his clients
How to Calculate Brokerage Charges in Share Market?
Before carrying out a transaction of buying or selling shares, users must understand the brokerage charges. Doing so will help them understand their potential profits or losses while carrying out a transaction. This is particularly true for intraday traders with a low-profit margin.
To calculate brokerage charges, investors must understand the different methods brokerage firms have adopted to compute the applicable brokerage charges on a transaction. These different methods are:
- Brokerage charge as a percentage of trading volume,
- Flat brokerage charge per transaction, and
- Subscription-based model.
Brokerage Charge as a Percentage of Trading Volume
Brokerage firms following this method charges a fixed percentage on the trading volume as a brokerage charge. For instance, let us assume that you are selling 500 shares of X Company at Rs. 620 per share. Here, the total transaction is worth Rs. 3,10,000. Suppose your broker charges a brokerage fee of 0.05% on your trading value. In that case, the brokerage charge will be Rs. 155. In such a transaction charge model, the brokerage charges increase as the trading volume increases.
Flat brokerage charge per transaction
Brokerage firms following this model charges a flat fee of a specified amount on each transaction regardless of the trading volume. For instance, if a broker charges a brokerage fee of Rs. 20 per transaction, then a single order placed with a transaction value worth Rs. 10,00,000 would entail a brokerage fee of Rs. 20. Similarly, an order placed with a transaction value worth Rs. 50,000 will translate to a brokerage charge of Rs. 20 only.
Conclusion
The buying/selling price of a security and the associated volume significantly impact the brokerage charges depending upon the brokerage fee model each broker has. While full-service brokerage firms generally charge a percent-based brokerage, discount brokers charge a flat fee on each order.
In addition to the various services offered, investors and traders must consider the varied brokerage fee model adopted by different brokerage firms while deciding on their brokers. This decision will significantly influence each transaction's overall net profit/losses.