Last updated on January 12th, 2017
Recently we came across a post in one of the popular trading forum of India, Traderji. Many new Traders/Investors are not aware of the “Minimum Brokerage charges” Policies set out by many Stock Brokers of India and wake up to the rude shock when they see the contract notes next day. So this article explains various clauses like this which are not known to many retail Investors.
Minimum Brokerage Charges for Penny Stocks:
Ok, coming back to the Post, this gentleman purchased 24,900 shares of FCS software Ltd at Rs1.10 and found that Rs 2500 is charged by Sharekhan as brokerage charges!!. Also, next day his shares were apparently sold off (for reason not known to us) and charged Rs2500 again on sell side.
Just imagine this scenario wherein he has to loose 20% of his investment just in the form of brokerage charges. Off course there will be taxes and other statuary charges to rub salt into his already wide open wound. Call it ignorance or misselling or laziness to understand the brokerage structure of the broker before signing the dotted lines, choice is yours.
Look at the brokerage charges of Sharekhan specified (Source link).
As you can see, he expected brokerage of 0.5% on his purchase, which would be around (1.1*24900*0.5)/100 = Rs 135 (approx). But what he clearly missed is the minimum brokerage per share clause which states that, minimum brokerage will be 0.5% or 10Paise/Share, whichever higher. If we do the math with Rs 10Paise/share, his brokerage on 25000 shares will be Rs 2500.
And see the tax calculation below, you will be surprised that service tax itself is more than the Rs135 brokerage charges that he initially expected!
- Service Tax = 14 % on the brokerage = (14*2500)/100 = Rs350 (ST is revised from 12.36% to 14% recently)
- Education Cess = 2% on ST = Rs 7
- Higher Education Cess = 1% of ST = Rs 3.50
This is the effect of minimum brokerage charge policy with penny stocks (whose price is less than Rs10). Now let us look at its effect on another scenario.
Minimum Brokerage Charges per Transaction:
As there is minimum per share charges, few brokers charge minimum brokerage per transaction. Look at the screen shot of the ICICIDirect brokerage charges.
What it means is, Investor will be charged minimum of Rs35 or 2.5% of the trade value which ever is lower irrespective of the transaction amount for shares whose price is greater than Rs10. And for penny stocks, charges will be 5paise/share as we already discussed above.
Example: Assume you buy 2 shares of Rs 500 each so that total value is Rs1000. Now if you go by 0.55% brokerage, Rs5.5 is the expected brokerage charges. But ICICI direct charges Rs 25 which is 2.5% of the transaction value.
This clause hits the small investors/traders hard who do many transactions of less than Rs 6365. He /she has to make profit of atleast 5% excluding taxes to just break even .
The 2.5% upper limit on maximum charges:
You may be wondering how this 2.5% mentioned in above discussion is arrived?. Thankfully in India the regulatory rules does not permit any broker to charge more than 2.5% of the traded value. Although, it is commonly believed that this maximum brokerage limit is defined by SEBI, in realty it is done by Stock Exchanges. Maximum brokerage that can be charged by Brokers is decided by exchanges like NSE, BSE and MCS-SX and is mentioned in the Bye-Laws of the Exchange. You can read this entire circular by NSE here
To summarize, minimum brokerage policies affect the traders in following ways
- Trader should have exit target of alteast 5% to make profit
- It is highly expensive to trade in Penny stocks
So what is the solution?:
If you happen to fall in one of the above categories, that is, either you trade in penny stocks or invest in small amounts, then any broker with minimum brokerage policy will be big NO for you. Fortunately, there are some brokers in India called Discount Stock Brokers who does not have any policy regarding minimum brokerage charges for trading and investing. Some of the well known discount stock brokers of India are Zerodha and RKSV who have good track record since 2010. They charge a flat fee of Rs 20per order or 0.1% (0.01% for intraday) which ever is lower irrespective of the transaction value. It is important to note the term “which ever is lower” which makes the big difference.
Lets calculate the charges of Zerodha for the FCS case that we discussed. These brokers provide brokerage calculators on their website using which one can foresee all the charges before initiating the trade itself. For example, You can check Zerodha Brokerage Calculator and RKSV Brokerage Calculator.
As you can see, the total loss could have limited to just Rs 102.75 instead of Rs5000 + Taxes if our friend knew about the minimum brokerage policies and about discount brokers.
- Read our detailed review of Zerodha at Zerodha Review
- Read our detailed review of RKSV at RKSV Review
So what is the catch with Discount Brokers?!
It should be very clear that, just because of minimum brokerage policies, full service brokers such as ICICIDirect, sharekhan and Angel Broking does not make bad brokers. They are leading stock brokers of India with top notch customer service. It is also advantageous to trade with them in certain cases which we will talk about it in another article. But as far as the above two scenarios are concerned, discount brokers are best suited and offer lowest brokerage charges in India.
Discount Brokers provide bare minimum infrastructure to enable the trader to execute his trades on the stock exchanges. And this is the only catch!. There will be no research reports, stock recommendation provided like ICICIdirect or sharekhan. Because of this limited overheads, they can afford to have no minimum brokerage policies. If you can trade on your own and if you trade frequently then opting for trading account with Discount Brokers can save lot in terms of brokerage charges and taxes.
The purpose of this article is to educate our newbie trader friends about how selecting a stock broker who does not match their trading profile can cost them. Minimum brokerage charges policies can burn a big hole in their pocket if they are not understood properly.
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