Fixed cost is better than variable cost brokerage

Is Fixed cost brokerage (discount brokerage) more cost effective than variable cost brokerage?

It’s a myth!

Let’s say Dhanibhai charges you 0.01%* on purchase and 0%* on sale, in an intra-day transaction. Then there’s Moneybhai, the discount broker, who charges you Rs 20* on each leg of an intra-day transaction – buy and sell, irrespective of the volume of that transaction. Would you say you are better off with D or M?

It’s not rocket science. It’s simply a matter of doing some basic math.

Let’s say you purchase stocks worth Rs 1 lakh. You would have to pay Dhanibhai Rs 10 (0.01% of Rs 1 lakh) on the purchase and nothing on the sale.

Now, if you went with Moneybhai, he would charge a fixed amount of Rs 20 on the purchase and another Rs 20 on the sale. You would end up paying Rs 40 on the intra-day trade.

QED: The variable trade cost is lower.

Now what happens when the volume transacted increases to above Rs 4 lakh?

Of course, the fixed rate (discount rate) becomes more cost effective.

But think about this. Even if a retail investor has plenty of capital to put into the intra-day market, how often do you see such a trader allocating more than Rs 4 lakh to a single trade?!

 

* In the current times, most variable cost brokers charge a fee of 0.01% on only one leg of an intra-day transaction and most discount brokers charge Rs 20 on each leg of an intra-day transaction. Naturally, if these rates change, the premise of the article will change.

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Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. Information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.

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