Discounts and Misconceptions
Last year, my wife and I visited my cousin’s place and my wife saw a clock on the wall; it was the same clock she had seen in a shop recently. My Bhabhi told my wife that she had ordered the same same clock online at a rate of Rs. 300 lower. My wife (being a typical wife :-)) was checking the watch, up and down, to see if there was any defect because of the discount and found that there wasn’t any. The only difference between the two clocks was that my Bhabhi got a discount because she ordered the clock online. After that they showed us a lot of things they had ordered online with not a single defect and really good amount of discount.
That day we came to know the advantages of online discount shopping. This concept is exactly related to the brokerage industry. I have a lot of friends trading with traditional brokers charging heavy amounts of brokerage. I didn’t know why they were trading with their brokers: surely there must be some types of facilities they provide which discount brokers are not able to provide. I decided to search on the same and discussed with the same group of friends.
They are all heavy Option traders and I asked them how much they pay in brokerage on a lot basis in Options. I was flabbergasted to know some paid 50 Rs, 60, up to Rs 100 on one side, which means double after they squared off their positions. I asked them what made them pay so much in brokerage. The answer disappointed me a bit when they said that in online discount brokerage you need to have good knowledge of computers and they did not want to learn how to use computers. We all collectively calculated the amount of brokerage which one of our friends had paid in a span of a year and was again shocked to see he had paid around Rs. 1,25,000 in brokerage in a year with little profit earned. Basically, all were working for a broker and not for themselves.
My friend gave me an example in which he used to buy 20 lots of Nifty Options at one time and sell the same. After buying, he had to pay premium to his broker (gone are the days when exchange allows you to trade without putting up margin).
I introduced them to the concept of online discount brokerage. In today’s world where we have reached the moon, to save on brokerage you have to learn how to use computers for online trading, which is not at all a big deal. Still, if the trader is reluctant to learn computers, brokers offer CnT (Call and Trade) for low rates as well, but it is best for the trader to learn how to use basic software and trade online.
If you are not trading with a discount broker, ask yourself if it worth it to trade with your current broker. Chances are that you might be having misconceptions.