Understanding Brokerage Fees: What They Are and How They’re Calculated

In any market, it is rare for a buyer and seller to meet each other directly. They are often put in touch with each other by a broker, who charges brokerage fees for making the two parties meet.

When it comes to the stock market, these days we have companies that act as brokers by providing an online trading platform to people to buy or sell securities. To use their platform to trade in securities, we have to pay brokerage fees to these brokers.

To find the best free demat account for yourself, you need to understand the concept of brokerage fees. The type of brokerage fees depends upon the kind of broker involved and the nature of service being provided to a client.

Types of brokers in India and their fees

• Full-service brokers: These brokers provide many services to their clients, beyond providing a platform to trade in securities, including planning their finances, advising for investments, consulting for taxes, preparation of tax returns, etc. As they provide many services, they charge the highest fees as brokerage.
• Discount brokers: These brokers do not provide investment advisory services like full-service brokers. Hence, they charge lower fees than full-service brokers. This is why they are called “discount brokers.” These brokers usually provide an online platform for people to buy or sell shares. Beyond this, they do not provide many services.
• Zero brokerage trading apps: Recently, we have seen many trading apps being launched in India that charge zero brokerage. In other words, participants do not have to pay any brokerage fee to trade in securities while using these apps.

How Brokerage Fee is Calculated

Different brokers charge brokerage fees in different ways. For example, some brokers charge a flat fee, regardless of the value of the transaction. However, some brokers charge a fee based on a fixed percentage of the value of the transaction.

As the methods of calculating brokerage fees may vary, you should thoroughly check about this aspect before signing up with a broker. It is important to keep in mind that a brokerage fee is applicable for both buying and selling a security through a broker.

In other words, you must pay it whenever you execute a transaction through your broker.

Suppose a broker charges a 0.02% fee on the value of a transaction and you buy shares worth Rs. 100,000 through him. In this case, you will have to pay Rs. 20 as brokerage fees to him (0.02% * 100,000).

Factors Impacting Brokerage Fees

1. Buy or sell price: The price at which you buy or sell a security is an important determinant of brokerage fees. Typically, the higher this price, the higher brokerage fees you have to pay, and vice versa.
2. Volume: Another important factor that affects brokerage fees is the volume of a transaction. Usually, the higher the volume of a transaction, the higher the fees, and vice versa. However, some brokers may offer you a lower commission if the volume is very high. Hence, it varies from situation to situation.
3. Type of broker: As discussed above, full-service brokers charge higher fees than discount brokers because they provide more services than the latter. Hence, the kind of broker you have also affects the fees you pay as brokerage.

Conclusion

If you want to find the best demat account, then you need to understand how brokerage fee is calculated. A demat account that is not right for you will not provide you with the services you need and will make you pay for services you do not need.

Hence, before signing up with a broker, you must ask yourself which services you need. If you need investment-related advice, you should opt for a full-service broker. However, if you do not need advisory services and only want a platform to trade, you can go for a discount broker.

It could be that you need a free demat account. However, even to reach this conclusion, you should first examine the services you need from a broker.