The brokerage industry like every other industry witnessed a change with the advent of the internet and better technologies of communication. Unlike in the past when only a certain class of people had access to the stock market, placing a buy or sell order today merely requires an internet connection, a bank account, a Demat account and a smartphone which gave birth to discount brokerages.
The online brokerage is synonymous to discount brokerage. They charge relatively less than a full-service broker. The full-service brokerage provides several other services such as market analysis and investment advice. Currently, the internet has given a boost to discount brokerages. It is attracting new traders, mostly young and tech-savvy.
Difference between a discount broker vs full-service brokers
- Discount brokers mostly charge a low fee and provide service to traders who have comparatively smaller capital to trade with when compared to traders who go for full-service brokers.
- Full-service brokers do not just execute buy and sell orders for their clients, they provide a whole host of services like research on trending topics, sectoral and stock research and tax planning etc.
- Discount brokerages are mostly self-directed and very active traders. Therefore the services are also centred around helping such investors monitor movements regularly.
- Full-service brokerages have physical branches at multiple locations and provide both online and offline services, unlike discount brokerages.
- Transaction cost charged by a full-service brokerage is higher than that charged by discount brokerages.
- Full-service brokerages have been there for ages and therefore traditional traders may find the trading experience far better than discount brokerages. However, this could be opposite for young traders.
Difference between discount brokers vs full-service brokers and which to choose
Investors with a large capital can afford to pay for professional investment advice and are typically more cautious and mature, therefore they go for full-service brokers. Such investors don’t frequent the market and are long term players. A high net worth (HNI) is highly unlikely to go into the markets without a plan and sound knowledge, simply because a lot is at stake.
In contrast, investors with a small portfolio, don’t find it logical to pay for financial advice, which could eat away a chunk of their returns. They are more frequent traders and just require brokers to place buy and sell orders. Therefore they can benefit from the lower commissions discount brokers charge.
Much also depends on the knowledge and experience level of a trader. Veteran investors with large capital to invest may choose a discount broker as they have a better understanding of the market, however, most don’t tend to do that. Therefore, there is no one size fit all brokerage service. It largely depends on your requirements and the size of the capital you want to invest.
Difference between discount broker and full-service broker in other Industries
Discount brokers and full-service brokers are also found in real estate and other fields of financial services. Like stocks, the brokers in the real-estate sector help clients buy and sell properties. Typically, if you already have your eyes on the piece of property you want, you would ask for a discount broker and pay him or her a fee.
Full-service real estate brokers conduct research on the housing market and advise you to make a better choice. Both types of services are provided in the insurance sector too.
Trend in India
With increased financialisation in small cities, India is witnessing a sharp increase in the number of traders using discount brokerage services. Recently a popular online payment platform got the license for stock brokering services. Besides a number of new companies established recently are gaining popularity among the young traders.
Discount brokerages are also benefiting from the current all India lockdown announced last month. Owing to the correction in the markets, new traders are using this opportunity to get into the market who prefer discount brokering. However, the traditional traders with large capital to invest mostly stick to full-service brokerages.
The type of brokerage service you avail mostly depends on the size of the capital a trader is ready to invest. It also depends on experience, knowledge and overall financial maturity of a trader. According to the current trend, young tech-savvy investors are flocking to discount brokers and traders with large capital to full-service brokers. Therefore if you wish to make a choice between a discount broker and a full-service broker, you must review the size of the capital you wish to invest and if you want a professional to advise and access more analysis.