Investing in the stock market has become increasingly popular in India as more individuals seek to grow their wealth and participate in the country's economic growth.
When it comes to trading stocks, a crucial aspect to consider is the brokerage charges imposed by brokerage firms. These charges can significantly impact an investor's profitability and should be thoroughly understood before venturing into the stock market.
Before we dive deep into the different types of brokerage charges that are levied every time you trade, let's get a hold of the parties involved in levying such charges, the methods of calculating the charges, and the factors influencing their variability.
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Who can levy charges on a trade?
The charges that you might have to pay for the execution of a trade are usually levied by the stock exchange, clearing house, government, the regulatory body, and the stockbroker. These charges may vary from entity to entity.
For example, the National Stock Exchange (NSE) might charge a different amount for facilitating a trade compared to BSE (Bombay Stock Exchange). While most of these charges are standard for traders, the brokerage fee is what helps investors make a decision on choosing a broker.
In a price-sensitive market like India, the brokerage fee and the sophistication of products offered by the broker matter the most.
What are the factors influencing the charges levied on a trade?
1. Brokerage Firm
- Each brokerage firm has a different fee structure.
- Full-service brokers generally charge higher brokerage fees compared to discount brokers, as they provide additional services, such as research reports, advisory services, and personalised support.
2. Trading Volume
- Brokerage charges may vary based on the trading volume of an investor.
- Some brokerages offer discounted rates for high-frequency traders or those who trade in large volumes.
3. Type of Security
- Brokerage charges may differ based on the type of security being traded.
- Equity delivery trades, where shares are held for more than one day, usually attract higher brokerage fees compared to intraday trades.
4. Account Type
- Brokerage charges can also vary based on the type of trading account an investor holds.
- Demat accounts and online trading accounts may have different fee structures.
What charges are levied every time you trade?
Understanding what your broker charges you for every trade executed is essential. Often, brokers charge you more in the form of hidden costs that go unnoticed by novice investors. These may be in the form of high DP charges or high account maintenance charges. However, there are a few other charges that are customary to any trade and are standard for all trades across all brokers. These charges are usually levied by the government or regulatory bodies.
- Brokerage Fee: The brokerage fee is the primary charge levied by brokerage firms for facilitating trades. It can either be a flat rate or a percentage of the trade value. Furthermore, it can be different for intra-day trades and different for the delivery of securities transactions.
- Securities Transaction Tax (STT): STT is a tax imposed by the government on the purchase and sale of securities in the Indian stock market. It is charged as a percentage of the transaction value and varies depending on the type of security. STT is levied to support market regulation and infrastructure development.
- Goods and Services Tax (GST): GST is a consumption-based tax applicable to most goods and services in India, including brokerage charges. The GST rate on brokerage charges is currently set at 18%. This tax is added to the overall brokerage cost and is borne by the investor.
- Exchange Transaction Charges: Exchange transaction charges are fees levied by stock exchanges, such as the NSE and BSE, for executing trades. These charges are calculated based on the transaction value and are typically a small percentage of the trade amount.
- Stamp Duty: This is a tax imposed on legal documents. Since buying and selling shares involves a legal transfer in ownership, stamp duty is levied on the buyer. It is usually a flat rate and varies across different segments. For transfers of securities other than debentures, it is 0.015%.
- SEBI Turnover Charges: SEBI turnover charges are fees levied by the SEBI (Securities and Exchange Board of India) on the turnover of trades executed in the stock market. These charges are applicable to all market participants, including brokers, traders, and investors.
SEBI turnover charges are calculated as a small percentage of the total turnover value of the trades conducted by an individual or entity. The charges are collected by the stock exchanges on behalf of SEBI and are used to fund SEBI's regulatory and supervisory activities.
- Depository Participant Charges: DP (Depository Participant) charges are fixed-rate fees levied by the Depository Participant on the sale of securities. These charges are applicable for the services provided by the Depository Participant in facilitating and maintaining investors' demat accounts.
DP charges in India cover various aspects of dematerialization and rematerialization of securities, account maintenance, and other related services. It is a flat rate charged by NSDL and CDSL, over which the depository participant might add its fee. For example, NSDL charges Rs. 5.5 for every lot of securities you sell.
Apart from the above-mentioned charges, brokerage houses may also charge account opening charges and maintenance charges. Both of these charges vary from broker to broker.
While account opening charges are fixed and a one-time payment, account maintenance charges are levied on a regular basis and are at the discretion of the broker.
The Takeaway
Investing in the stock market has gained popularity in India as individuals aim to grow their wealth and participate in economic growth. However, understanding brokerage charges is crucial for investors to make informed decisions and optimise their trading strategies for better returns.