Don't Let Your Broker Fool You With Zero Brokerage Offers

Jun 29, 2020

Vijay Bhambwani, Editor, Fast Profits Daily

This video is a continuation of the video that I recorded recently about the Robin Hood traders.

I believe the large number of newbies entering the market as traders will probably lose money.

Maybe one third or less, will stick around in the market. The remaining would have tried their hands at trading, lost money and exited the market.

If you have a demat account, you would have received calls offering you tips. You would have received emails promising new zero brokerage on the first 5 trades or maybe even the first fortnight or the first month.

The question is, should that be the only reason why you as a newbie, should come to this market to try your hand at trading? Does zero brokerage really made this deal so attractive for you to take the plunge and dive into the market?

Let's find out...

Hi, this is Vijay Bhambwani and I am recording this video still from my residence.

This video is specifically recorded as a continuation of the video that I recorded recently about the Robin Hood traders and how the large number of newbies entering the market as traders will probably lose money and maybe one third approximately, maybe a little less, will stick around in the market. The remaining say 60 to 70, maybe even 75% of the people would have tried their hands at trading, lost money and exited the market after the Corona lock down is over.

What is actually going to cause or trigger such a large number of traders coming into the markets for the very first time? Now if at all you have a demat account, you would definitely be receiving calls from call centres offering to give you tips, sure shot tips on how to double and triple your money. You would also be receiving emails from various brokers soliciting new clients, promising new zero brokerage on the first 5 trades or maybe even a first fortnight or first month or whatever. Different brokers, different schemes.

But the question is, should that be the only reason why you as a newbie, should come to this market to try your hands at trading? Does zero brokerage really made this deal so attractive that a guy who is never traded in his for her life should take the plunge and deep dive into the market?

I will want to give you two examples of how to think about this. I am sure most of the viewers here watching this video would have some friend of the other who has a taken membership of a time share holiday scheme. Now, if at all you're a member of any time share holiday scheme and you were to take your friend's unutilised timeshare, which is typically seven days in a year, you would basically start thinking that you've got a free holiday.

Hey, it's only the stay. Do you know most of these timeshare holiday schemes are located, the properties are located away from the city of the town that you're visiting and the food is invariably exorbitantly priced? So whatever you save in terms of accommodation, you tend to give back in food and commute because if you're going out for a holiday I'm, sure, you'd want to go sightseeing, and we being we, would think that the staying is free, so why not splurge on shopping? So it actually works out to be a more expensive deal.

Now, the second part of it, when I came to this market in 1986, I was a fresher. I didn't know what was happening in the market. Today, after having put in 34 years in the market, believe me, I'm a lot more cynical. I am more focused on not losing money as compared to making profits. Making profits is not a priority with me. Protecting my capital and not losing it, especially to somebody who's whole all and sole intention is to lighten my pockets, is my prime objective.

So when I look at trading, I look at it from a business point of view as a pure commercial activity, wherein I would have a strict control and track all my expenses, all my input costs, including trading, execution costs, commission, taxes that I have to pay. So let's have look at what kind of costs there are in trading.

First in foremost, you will open an account with the broker and the broker is entitled to brokerage. So you will be a brokerage first of all. Secondly, there would be GST on the brokerage. Now that would depend on the brokerage itself. The higher the brokerage, the higher GST you will pay. If it all your broker's telling you the first 5 trades or 10 trades or a fortnight or month is free, there will be no brokerage, no GST.

Typically speaking, if you were to go and open an account as a newcomer in any brokerage firm, you would at the most be paying not more than Rs 500 per crore of turnover. If you're paying anything more than that, believe me, you're not going to make it in trading, at least not in day trading or micro trend trading. Micro trend trading would mean getting in and getting out within 60 minutes of trade itself. So every 60 minutes your trade is basically squared up. You're a high frequency trader which means your brokerage must be low. so

Typically speaking, brokers understand that, and they give you a slam not more than Rs 500 per crore unless you really don't know how to negotiate. So 500 per crore and 18% on that 500 is something will be free if at all you were to participate in that scheme of zero brokerage.

Then comes the other taxes. STT or securities transaction tax. In case you're trading in the commodity market, it would be CTT for commodity turnover tax. These in the derivative segment, are Rs 1,000 per crore and believe me, as a person who treats trading like a business, that CTT or STT is the heaviest and the highest amount of execution cost that eats into my profits. That is not going to go away if your broker is charging you zero brokerage.

The second highest tax, at least in Maharashtra, would be the stamp duty. Now the reason why I mentioned Maharashtra was because every state has a different tax slab where stamp duty is concerned.

The third highest tax would be the exchange transaction charges. So whether it is the NSE or the BSE, both these exchanges charge a little bit of money based on turnover, to your broker and your broker, in turn passes it on to you. That is not going to go away either.

Then, and the smallest, is the SEBI transaction charges. Now, this is the money that goes to SEBI so that SEBI can basically take up investor protection cases and investor protection activities which is funded by the investors themselves by way of transacting on the exchanges. These charges are also not going to go away.

So what you're basically doing, here is not paying the second lowest charge, which is the brokerage. Remember, the STT is quite simply the highest, Rs 1,000 per crore in commodities and equities in derivatives. If you're trading in the cash market, here's something you should know.

In the spot market, even if you're doing intra day trades, your STT is Rs 2,500 per crore. Now that's steep. So even that is not going to go away. After STT comes your stamp duty. After stamp duty comes your exchange transaction charges in terms of falling amounts, descending order of the amount.

Brokerage is a distant number four. What your broker is basically telling is, you don't have to pay me this fourth highest execution cost or charges. Is that the only reason why you want to trade? I think you're beginning for all the wrong reasons.

As an experienced veteran trader, I know that I should be trading only when my system, when my set up warranties a trade. If I trade and get out at the same price I entered in, it might up your that I have neither made nor lost any money. But guess what? The execution costs, commissions, taxes still have to be paid.

So whether I make money or not, the government will charge me its share. Do be very careful about trading, just because the brokerage is low or the brokerage is zero for a certain period of time. Remember the old Wall Street saying, it's not entering a trade that pays your bills, but it's entering a trade, which you have waited for to fructify at the right time, is what pays your bills. Trade because you must. Not because the brokerage is zero.

So you want to be one of the newbies to enter the market. I think knowledge based decisions is what you want to get into, not just because the brokerage is zero or too low. Do take very good care of yourself, your investments, your health and your family but before I sign off from this video, let me remind you to click like on this video if you're watching it on YouTube. In the comments section, do let me know what you think about this video and what else you would want me to record in my next video.

Do subscribe to my channel and please don't forget to recommend this video to your family and friends. Vijay Bhambwani signing off for now till we meet again in my next video. Thank you so much for watching.

Stay safe and have a great trading day!

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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