Amit has saved Rs.50,000 from his salary over the course of a year and wants to invest it to enhance its value over time. He wants to invest in share markets but certain queries are lingering in his mind.
He understands he will have to go to a stockbroker to get started but he is not aware of the charges that he needs to pay. Will it be a lot of fees that will deplete his savings or will it be manageable?
And what will these changes be for, will there be transparency or some hidden charges will come to surprise him later? Amit’s concern is similar to that of most new investors who face the same issue before starting their share market investment journey.
Demat and Trading Account
The first thing to know is that to start trading, a Demat and trading account is needed. Today, share market operations are fully digitized and share trading happens online.
The shares exist in digital forms and are traded in their digital forms themselves. A Demat account is an online account that stores the shares bought. Just like a bank account stores money in digital format, the Demat account stores shares in digital format.
Demat Account is linked to a trading account, which is used to transact in the share market. You can place orders to buy or sell shares through the trading account.
The shares bought get credited to the Demat account. Both, the Demat and the trading account are linked to each other. The trading account is linked to the bank account he facilitates the transfer of money between the trading and bank accounts.
The stockbroker helps open Demat and trading accounts and the charge they levy are broadly 3 charges: charge for opening this account, charge for maintaining this account, and the charge for transacting through these accounts. Let’s look at these 3 charges in detail.
Demat and Trading Account Charges
1. Account Opening Charges:
The fee you pay to a stockbroker for opening your Demat and trading account. To open the account, you fill out an application form and submit your documents for KYC. While account opening, a stockbroker will charge an account opening fee.
Since most brokers have gone online these days, you can fill their form online and pay the account opening fee through net banking or UPI. The fee may vary from Rs.300 to Rs.2500 depending on the broker. Some even provide the option to open a free Demat and trading account.
2. Annual Maintenance Charge:
This is the fee that the stockbroker charges for maintaining your account. This is a charge taken every year. Some stockbrokers may charge it quarterly and may refer to it as ‘Account Maintenance charge’. This charge also varies across the stockbrokers. While some may charge around Rs. 500 annually, some may charge Rs.1000.
There are stockbrokers who waive off the annual maintenance charge for a year and levy the charges only from the second year.
3. Brokerage Charge:
This is the charge levied for the transactions done in the stock market through the Demat and trading account. The brokerage charge differs as per the kind of broker.
A full-service broker, which provides a host of value-added services to its customer, like assigning a dedicated relationship manager, providing stock market analysis, helping build a portfolio, sharing customized reports, giving investment advisories, etc. charges a higher brokerage per transaction.
The brokerage is a percent of the transacted value. E.g. it can be 0.5% of the transacted value. So if your single transaction was for Rs. 10,000, the brokerage will be Rs.50. If it was Rs. 100,000, a brokerage will be Rs. 500.
Another type of broker is the discount broker. They do not provide any advisory or relationship manager, but only a Demat and trading account with basic tools that can help you make investment decisions by yourself.
Hence, they incur lesser expenses to manage the business, and hence it translates to lower brokerage for its customers. They normally charge a flat fee per transaction, irrespective of the trade transaction value.
So, if their brokerage is a flat fee per transaction of Rs. 17, it means whether you transact for Rs. 10,000, or for Rs.100,000, you will be charged Rs.17 in each case.
With clarity about these charges in mind, you can go ahead and make your decision as to which stockbroker to choose and which charges to look at.
Disclaimer: Investments in the securities market are subject to market risk, read all the related documents carefully before investing.