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.