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What are Discount Brokers?

The discount broker is a concept where a broker charges very low commissions as compared to market norms (mostly set by traditional full-service brokers in India) and attract the existing clients of other firms. Since the rates are significantly lower, they usually resort to online and call-n-trade. Discount brokers charge a very nominal fees for trading and investing. Active traders can save over 90% of their annual brokerage charges by using discount broker service.

Unlike full-service brokers, you won't get a relationship manager or chance to visit branch. They do not provide research and advisory services to save cost. Even the customer verification takes place through internet (over skype video call). Trading is only allowed online or through phone.

Full-service brokers provide you facility to visit branch and also provide a relationship manager. Since they charge very heavy brokerage they can afford to setup branches and personal relationship managers. If you are a frequent trader and for some reason you don't trade for a month, you are likely to get a phone call or visit from your RM. The role of RM is to retain the client. Discount brokers cannot afford to provide such services.

Personally, I don't like to be bothered with unnecessary calls from RM. So Discount broker actually works for me.

Discount Brokers in India:

Discount brokerages have very recently started in India. With the launch of Zerodha and RKSV, just five years back in 2010, the discount brokerages started changing the industry for good.

Discount brokers charge a reduced commission and do not provide investments advice. The best known discounts brokers in India are Zerodha, RKSV and Tradejini; there are also few smaller players in the market as well, but based on the returns these three are the largest. Charges are kept low because discount brokers offer fewer employees, fewer products, and no advisory teams. Lately, discount brokerage is becoming very popular in India as more and more people have access to internet and several people are now investing using their own knowledge.

Is Discount broker a good choice for me?

Pros

The biggest advantage of trading (investing) with a discount broker is that the investor can save a lot of money on transactions. When working with a full service brokerage, investors usually have to pay hefty amounts of money in commissions to brokers. These commissions might be a flat fee or they might be based on the volume of the trade. If one trades frequently, these commissions can add up quickly. By using a discount broker, an investor can save large amounts of money and increase profits.

Another advantage that you could experience by working with a discount brokerage is safety. Most of the time, if the brokerage can afford to reduce commissions, this means that they are making up for it in bulk. Usually, the most recommended discount brokers are going to be very large companies. This means that your investment is going to be safer than if you choose a small brokerage company that is relatively unknown.

Discount brokers operate in a more straight forward manner. Discount brokers offer a trading platform for their customers to make the trades of their choice. They don't offer advice and guidance and are there typically to facilitate the transactions their customers wish to make. Discounts brokers rely on offering a quality, efficient service that enables their customers to buy and sell investments easily.

Cons

By using a discount broker, the customer doesn't get the advice and analysis. However, several online discount brokers have a variety of trading and researching tools which can, in part, offset this disadvantage.

With a discount broker, you might also risk giving up some features and services that you would be able to get from a full servic brokerage. With a discount broker, you might not be able to invest in as many different types of securities as with a traditional broker. Most of them are only going to focus on the most popular types of securities. This is going to restrict your options and it could seriously affect your profits in the long run.Most discount brokers do not allow to buy bonds or mutual funds or insurance.

Some full-service brokers include banks such as ICICIDirect or HDFC Securities. If one has account with these companies, you also get the 3-in-1 account. Since banking and broking is provided by the same company, you can have your demat account linked to the bank account. But there is also disadvantage of opening trading demat account with banks. You cannot link security account from one bank with your savings account in another bank.

How to Choose a Discount Broker?

Once you have made up your mind to open an account with discount broker, you should probably compare them on the following parameters:

Trading Platform Quality and Up-time

The most important thing to consider is the trading platform. The trading platform should be user-friendly and intuitive. While making trade decisions, you do not want to be thinking about which button to click.

Make sure the broker has trading app for smart phones. If you are android user, you should look for reviews about android app of that broker. Similarly for iPhone users, they should choose a broker with good iPhone app.

Trading through phone should be easy. Sometimes we also need to use website to access our trading and demat account. An intuitive web-based service is also a plus.

Customer Service

It's important to know the kind of customer care service that the brokerage offers. In researching you will certainly want to see how the brokerage does at sending you all vital material you ask for online.

Pricing

Beyond the price-per-trade, you will find that brokers may charge other fees, including fees for closing an account, fees for transferring assets into the account, IRA custodian fees, account inactivity fees, wire transfer fees, annual fees and charges for not maintaining a minimum required balance.

Charting

If the broker can also provide you live charts within that price that is an extra plus. So make sure you ask them about the same. Some brokers like Zerodha, RKSV have recently launched charting facility where you can place orders directly on the chart.