Analysis and Comparative study of various types of brokerage

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Weekly Stock Market Newsletter - Finappleideas

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June 27, 2017

Dear Member,

Detailed analysis and Comparative study of various types of brokerage firms and trading accounts available in India:-

Basically, we have the following three categories of brokerage firms currently available:-

1. Banking Firms - Like ICICIDirect, AxisDirect, SBI, HDFC etc. These are the most reliable as they are directly owned by large banks and hence can be trusted.Main benefit is if you have your bank account also in the same bank, the money transfer is quite seamless and easy.Main problem is they charge very high brokerages. Example, ICICIDirect charges 0.55% for each buy and each sell for delivery (not day trading) of stocks. So, you end up paying 1.1% brokerage ie Rs 1,100 for one transaction of Rs. 1L. You may reduce the same to 0.35% per buy or sell by buying a prepaid brokerage plan of Rs. 25,000 which should be done only if you do lot of transactions. This loss in brokerage is compensated partially in terms of the savings account interest rate you get paid on the "unused funds" which is laying in the bank.It matters as on an average all most 30-50% of your funds will be laying unused in cash waiting for investments. These firms also provide sms/email alerts along with tips and buy recommendations. Another thing is its very easy to apply in any IPO or buy any mutual funds using these accounts. Its recommended for those who are not big investors and who are not short term traders/ frequent traders/ investors.

Bank Broker

2. NBFC Brokerage Firms - Like Motilal, Angel Broking, Sharekhan etc. These firms are reasonably reputed and charge comparatively lesser brokerages. They also provide regular tips and recommendations etc. Moreover they provide margins ie if you have 1L then you can buy stock worth 5L if you are doing day trading but then if you are at loss, your loss also becomes five times. Their chart patterns are quite good. Main problem with them is they force or motivate you much more to buy small caps or penny stocks and want you to do more and more transactions so that they get more brokerages. Can be used by all people. They generate revenue from brokerage and float fund (unused cash) available in their customers account free of interest. It may be a problem in case market goes for a major crash suddenly and most customers are withdrawing their funds together.
Also, they do provide portfolio management services to their HNI (High Networth Individual) clients.

Brooking Company

3. Discounted Brokerage Firms - Like Zerodha, Samcon etc. These are new generation, technologically smart brokerage firms which are becoming very popular in recent few years and have already acquire millions of customers. 
Major benefits are literally zero brokerage for all deliveries, Rs. 20 brokerage per transaction of any amount for all day trading etc.
They have excellent technical charts and excellent software system.
Their main revenue source is the volume brokerage from a very large base of very less brokerages per customer and also they get interest free float (unused cash lying in millions of clients account).Main problems are they do not provide any tips or recommendations (they are basically no frills brokerage firms like air deccan when compared with full service brokerage firms like jet airways in airline industry parlance).They are very good for high volume transaction or frequent transaction customers. So, a very good choise if you want to to day trading, short term trading or high value long term transactions. Another main problem is you can not directly apply in IPOs from their accounts. You need to use the DPId and AccountId provided by them in your bank account to apply for IPO using ASBA which is quite easy process similar to NEFT.
Hence, the crux is:-
If you are a long term investor with limited funds who does not want to do frequent transactions, go for banks.
If you want to do many high volume transactions or short term investments or day trading or frequent transactions, 
a. Ready to pay higher for tips and recommendations or portfolio management services go for standard NBFC brokerage firms.
b. Don't want to pay hefty brokerages for tips, recommendations etc which are anyway available free of cost on internet and also want to learn and use various technical charts, use discounted brokerage firms.

My recommendation - Open a banking trading account (preferably with the bank where your savings/salary account is there) and use it to buy only long term large cap good companies for keeping the stocks for years and also open a discounted brokerage firm account and do all your experiments, learn technical charts, buy and sell intraday or short term investments etc. This way you will get all the tips and recommendations too from banking firms and zero brokerages too from discounted brokerage firms. You get safety and support from banks and efficiency and cost savings from discounted brokerage firms both together. 

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