Discount brokers versus full service brokers: what’s the difference? Part 2
RKSV is one such discount broker. We are often asked about the difference between a discount and a conventional broker. Here’s a look:
- Services offered: Since discount brokers follow a low-fee business model, they are compelled to curtail the scope of their services. They don’t maintain a vast customer service team and encourage customers to trade online, on their own. The services they offer generally include high-speed trading and execution, telephonic trading, and some basic back-office services. Services like a personalized relationship manager, comprehensive research reports, portfolio management, investment advisory and trading on margins don’t fall within their purview.
- Asset classes offered: Most Discount brokers offer trading in equity shares. A large number of them also offer trading in futures, options, currencies and commodities. However, they don’t offer trading in bonds, debentures, corporate fixed deposits, initial public offers (IPOs), mutual funds and other packaged products unlike full-service brokers.
- Brokerage fees: Discount brokers generally charge a fixed amount per trade, irrespective of the size. Conventional brokerages charge a fixed percentage of traded value per trade. This percentage keeps falling as the traded value increases, with more discounts offered for bulk purchases and block deals. A fixed rate regime is of greater benefit to investors with large trading volumes than smaller investors. This is because the percentage method leads to much higher brokerage for larger trades.
- Physical presence: Owing to a limited scope of services and encouragement for self-trading, discount brokers do not require a big staff or a large network of sub-brokers like conventional brokers. This reduces their costs and allows them to pass this benefit on to customers.
- Trade security: Discount brokers usually believe in quality over quantity. They may offer lower number of services, but they do focus on giving top notch quality. This is includes security. That’s why, despite the smaller scope of services and a limited physical presence, trading with discount brokers is perfectly safe. In fact, funds under management of major discount brokers are larger than those of most full-service brokers.
Both categories of brokers have to register with the Securities and Exchange Board of India (SEBI), India’s financial markets regulator and adhere to its regulations. They are members of the same exchanges- National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Multi Commodity Exchange (MCX); and execute trades through the same depositories- National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
Yet, discount brokers have attracted a large share of the brokerage market by offering trading at a lower cost and through an electronic platform. They are ideal for investors with large trading volumes and highly developed market acumen as they don’t charge variable brokerage, on percentage basis and do not offer market advice. The good news for smaller investors is that the advent of discount brokers has forced others to cut commissions and adopt a flat brokerage regime. This will make investing cheaper for everybody in the long run.
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