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How Brokerage Charges are Calculated in the Stock Market – Forbes Advisor INDIA

Brokerage charges can appear complex. Even though these are mentioned at the time of signing on, many investors still fail to understand them. Whether you are a trader or an investor, it is crucial for you to conceptually understand these charges and their impact on your transaction. 

What Is Brokerage?

Before you can trade or invest in shares, you must have a trading and a demat account in your name. These enable you to buy and sell shares on the stock market. The stock broking firm through which you buy and sell shares charges a fee for its service. This fee is what is known as the “brokerage”. 

The brokerage charged by stock brokers is not fixed or regulated by any central authority. Thus, the brokerage charges across multiple service providers are not uniform or even consistent. The regulator has only fixed an upper limit for brokerage at 2.5% of the transaction amount. 

Currently, in India, there are four different ways through which stock brokers levy brokerage charges. Let us take a look at each of them:

As the name suggests, in this mode, for every trade that you make, a flat fee is charged. Thus, irrespective of the traded value, the brokerage that you have to pay remains the same. However, this is subject to a condition that if the percentage brokerage is less than the lower amount is charged to the investor. 

For example, a broker may charge a flat fee of INR 20 or 0.1% of the traded value, whichever is lower. So, if your traded value is INR 10,000, your brokerage will be INR 10 (10,000 * 0.1%), as it is lower than the flat fee of INR 20. This is so far the most popular method of levying brokerage on trades especially for discount brokers.

  • Brokerage as a percentage of the traded value

Stock brokers charge a percentage of the total trade value as brokerage. Simply put, the higher the value of a trade, the higher the brokerage is likely to be and vice versa.

A few stock brokers have come up with monthly trading plans that allow you to place an unlimited number of trades in a month irrespective of the value of the trades. And in return, they charge a monthly or yearly subscription fee. 

There are quite a few discount broking houses which do not levy any brokerage on the transactions which are delivery based (details below).

How is Brokerage Charged for Different Transactions?

There are typically four types of transactions that can be done while trading in the stock market on which brokerage is charged, namely:

1. Equity delivery 

All trades in which you hold a stock for more than a day are said to be delivery based trades. Brokerage is charged on both the purchase and sale, on the trade’s value. However, as you would know, many brokers do not charge for delivery-based trades. But, before you jump with joy, hold your horses; we will explain this in a little more detail in the later part of the article.

2. Equity intraday

If you buy a particular stock and sell it on the same day, then the trade is considered as an intraday trade. Here, intraday brokerage is applicable on both buy and sale transactions. It can be expressed as a percentage of the transaction value or as a flat fee; for example, 0.1% of the turnover (Number of shares x price of the share) or INR 20, whichever is lower, per executed order.

3. Equity futures

You can buy stock futures (standardized contracts) and the money that you make or lose in a futures transaction is credited or debited to your trading account the same day. Here, the brokerage charges are applicable in the same way as equity intraday trades, i.e., expressed as a percentage of the transaction value or a flat fee.

4. Equity options

These trades are a significant part of the derivative market, particularly in India and act as a tool for protecting positions and reducing risk. Here, usually the brokerage charge is a fixed flat amount per order or lot. The brokerage charges for the above transactions differ from broker to broker. Apart from the brokerage charged, there are additional charges mandated by the law / exchange / regulatory authority, as mentioned below:

The above mentioned charges are applicable irrespective of which type of broker you choose, i.e., full service or discount broker (we will speak about the difference between them in the latter part of the article). So the only distinguishing factor across different brokers is the brokerage charged on different transactions.

Now let us understand how brokerage is calculated with the example of an equity delivery transaction:

Consider brokerage charges for equity delivery on buy and sale is INR 0.1% of the traded value. 

When you take delivery of equity, you are a buy-and-hold investor (often also called a…

Read More: How Brokerage Charges are Calculated in the Stock Market – Forbes Advisor INDIA

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