Discount brokers growing as investors see cost advantage

Nirdosh Gaur

Traditionally, stock trading is done through brokers by visiting their offices or through telephones. As the number of people trading in stock market has increased enormously in last few years, some issues such as location constrains, busy phone lines, miscommunication, etc. have cropped up. Information technology (stock market software) helps brokers solve these problems with online stock trading.

Internet boom has changed the trading trend from offline trading to online trading. The use of desktops, laptops, tablets and mobiles for trading in the stock market is changing the scenario of ease-of-doing stock trading. Investors and traders can check prices of stocks and news affecting markets at the speed of light. All world markets are now inter-linked only because of availability of news at a fast speed. More and more investors are moving from offline trading to online trading and the share of online trading has already reached around 14 per cent from 9 per cent two years ago.

A new breed of brokers — “Discount Brokers”— has developed a market for themselves in the past three years. They are giving options to traders and investors to trade in stock market at a minimal brokerage. They normally charge their clients Rs 15 to 20 per executed order. Savings of brokerage for traders who are doing trading with a discount broker can be up to 95 per cent and even more when compared with brokerage charges of full-service brokers. Discount brokers work on a low-cost model and normally have a few, and at times, only one office. The low cost model does not mean their services are not on a par with full-service brokers. Discount brokers provide trading facilities such as online trading platform, payment gateways, online back office reports etc. to their clients and these services are on a par or even better when compared with services of full-service brokers.

They rely entirely on online trading platforms and their main investment is on latest technology to provide seamless trading experience to traders and investors. They invest majorly in technology up-gradations on a regular basis to keep up with market trends and also provide their clients new trading options available in market.

They normally do not provide tips to their customers. They educate their customers through online classes, study material, blogs or regular articles in a simplified manner on company websites, social platforms and via newsletters.  Discount brokers try to make their customers self-reliant by providing easy trading software, good customer support and an easy online back office portal. Since discount brokers do not provide advisory, they make their customers do their own research and take investment or trading calls, thus helping them understand the nuances of trading better. Often, these calls turn out to be better than even the advisers.

Given its inherent advantages like low brokerage, use of superior technology, and faster execution of trades, the discount brokerage segment is set to disrupt equity trading habits of investors and traders. It is also likely to severely dent businesses of existing full-service brokers.

The segment of discount brokers has grown rapidly in the last three years due to their distinct edge over full-service brokers when it comes to trading costs. Discount brokers are increasing their market share every year and their business is currently growing at a rate of 70 per cent from the past three years. The market share of discount brokers is in the range of 8-10 per cent and this is expected to expand to 30-35 per cent in three years. The segment could well be the future of Indian stock broking industry.

The author is MD & CEO, Moneypalm. The views expressed in this article are his own.