How to Reduce Your Brokerage Fees

5 mins read
by Angel One

Stocks allow for individuals to lay claim on varied businesses by investing a portion of their money in a given company. This provides them with ownership to a fraction of the company along with its assets and profits equivalent to the quantity of stocks they possess. Multiple stocks of a single kind are referred to as shares. Companies benefit by opening up their ownership in this fashion as it fuels their operations and allows them to be more fiscally solvent. They issue new shares as and when they need to raise additional capital. Buyers can invest in either common or preferred stocks based on the gamble they are willing to take.

Buyers and sellers of varied stocks constitute the stock market. Within the stock market trades can be electronic, over the counter or via varied stock exchanges. Stock exchanges provide the infrastructure within which the sale and purchase of these stocks is made. This includes assuring its participants of price transparency, liquidity, price discovery and fair dealings over the course of all trading activity. The stock market contains a roster of all companies that offer public investors with the opportunity to avail of their shares. In addition to stocks, financial securities of a different nature can also be traded. These include commodities, currencies and bonds. Stock markets allow for secure and regulated environs under low operational risks.

What are brokerage fees?

In order to help buyers navigate the stock market with ease varied units operate as professional traders. They may be individual brokers or registered representatives who act alone or under a brokerage firm. Brokers derive a revenue on a commission basis although their manner of compensation may vary based on their employer. Historically, brokerage fees have been expensive as they offer a wide range of services most of which contribute to the generation of wealth. Brokerage fees exist in order to cover a wide range of costs including those associated with maintaining client accounts, research, and providing access to investment platforms. They may be a fixed payment or could cut into a given percentage of the balance available in a clients account. They may also be used as an insurance in instances of if dormant client accounts.

What is discount brokerage, when did it begin & what does it allow for?

Prior to the ease with which the internet and virtual communication were made possible, being able to afford a broker was an expensive enterprise. With advances made in the digital world it is now possible to consult brokers and avail of their services over different mediums. Most brokers providing services online offer these to a wider gamut of investors – some of whom have a smaller spending capacity. This has brought about the creation of discount brokers who offer only a limited range of services as opposed to full-service brokers. The latter provide their clients with personal consultations, tax and estate planning services. As discount brokers offer limited services, their brokerage fees aren’t as exorbitant, making them feasible options for those looking to cut costs. This is especially beneficial to those investors who actively buy and sell securities on the regular. Traders who have concise portfolios or those that only want trades executed on their behalf account for clients of discount brokers.

Ways to reduce brokerage fees –

By honing one’s investing knowledge one can potentially afford to select a discount broker rather than one that provides full-service thereby reducing brokerage fees. This of course means that one needs to be fluent with the market which more often than not only occurs over a period of time. Current financial status and financial goals need to be considered before deciding whether reducing brokerage fees and availing of a fraction of the traditional services provided is a viable option for you. Additionally, brokerage fees can be reduced by the following methods –

(i) Investing in exchange-traded funds (ETFs) rather than mutual funds as they almost always have lower expense ratios than mutual funds at par with them. ETFs are good options for those who have limited investment and market experience. They allow for investors to carry out long term goals as they are more passive in nature.

(ii)  Stocks that ask for front-end / entry loads – commissions paid at the time of purchase of a stock, or back-end / exit loads – fees paid when stocks are redeemed or so, can be avoided in order to reduce expenses.

(iii) Availing of robo-advisory services rather than those of traditional brokerage companies or professionals. Although the assets under advisory within Indian robo-advisories is comparatively lower than those in the United States or the United Kingdom, they are promising. Since robo-advisories don’t make use of any given individual to physically manage client accounts – as they are automated, their inhouse costs of operating are lower. They can therefore afford to charge prospective clients lowers fees. Presently, the vast majority of those taking advantage of robo-advisories are young people and millennials aged between 25 and 38 years old as per a survey conducted by CAMS in 2019.

(iv) Understand the difference between intraday trading charges and delivery charges. The former constitutes a smaller percentage as shares are bought and sold within a given day. The latter costs more due to stocks being held for a longer period of time.

(v)  Always look for benefits which range from brokerage cashback to discounts on Annual Maintenance Charges (AMC) directed towards your demat account.

(vi) Familiarize yourself with all fees associated with availing of brokerage services – including those that might be hidden such that you aren’t caught unawares in the future and don’t overspend. Brokerage firm disclosures highlight potential conflicts of interest. They must be read and understood prior to availing their services.