Activities of Brokers, Broker charge

23/08/2020 0 By indiafreenotes

A brokerage provides intermediary services in various areas, e.g., investing, obtaining a loan, or purchasing real estate. A broker is an intermediary who connects a seller and a buyer to facilitate a transaction.

Functions of a Brokerage

The main function of a broker is to solve the client’s problems for a fee. However, there are other broker functions existing today. A brokerage can:

  • Execute trades on the financial markets at the expense of the customer and on his behalf.
  • Provide information support about the situation on trading platforms, sending notifications about quotes and trading mechanisms.
  • Provide information about other market participants, making the correct decision for the client to conduct the transaction.
  • Lending to clients for margin transactions.
  • Storage and protection of customer data.
  • Creating a technical base to make transactions on the exchange.

Certainly, broker companies carry out a broader activity besides mediation. Without a broker, the financial market itself would not exist.

Types of Brokers

Brokers can be one of three types:

  1. Online brokers

A new form of digital investment that interacts with the customer on the internet. Online brokerages offer the main advantages speed, availability, and low commissions.

  1. Discount brokers

A discount broker is a stockbroker who performs buy and sell orders at a reduced commission rate.

3. Full-service brokers

A full-service brokerage provides a wide range of professional services to customers, such as tax tips, investment advisory, equity researching, etc.

Different Brokerage Specializations

Let’s take a closer look at the main specializations of brokers and their respective features:

1. Stock brokerage

A stockbroker is a professional intermediary on stock or commodity markets who sells and buys assets in the interest of the client on the most favorable terms.

Operations on the exchange market are difficult for outsiders and require a certain number of special approvals and permissions to finalize transactions. It is useful to address professional participants on a stock exchange, such as to brokers.

2. Credit brokerage

Credit brokers are specialists with the necessary information and professional contacts with credit institutions. They provide individual assistance to clients in selecting optimal lending options. They also assist with obtaining the needed financing, its conversion, and repayment, etc.

3. Leasing brokerage

A leasing broker is a specialist who is similar to a credit broker but in the field of leasing equipment. A leasing brokerage’s main clients include legal entities and commercial organizations.

4. Forex brokerage

A forex broker is an intermediary who provides access to the forex currency market. Since the forex market is open only to a certain number of organizations, access to it for individuals is possible only through the mediation of forex brokers.

5. Real estate brokerage

A real estate broker searches for buyers and sellers of real estate, e.g., warehouses, offices, retail, as well as residential properties. A real estate broker receives a certain percentage commission of the real estate transaction.

6. Business brokerage

A business broker offers its services for buying and selling an existing business. They usually deal with a business valuation, take part in negotiations with potential buyers, and generally help in the sale of the business.

7. Insurance brokerage

The main goals of contacting an insurance broker are as follows:

  • Mediators draw up insurance policies at a discount.
  • It saves time required to fill out an insurance contract.
  • It allows searching for better offers from insurers.

Different Charges on Share Trading

Security Transaction Tax (STT)

  1. Apart from brokerage, this is the second biggest charge involved while trading in stocks.
  2. For delivery trading, STT is charged on both sides (buy & sell) of transactions and is equal to 0.1% of the total transaction price (on each side of trading).
  3. For intraday and derivate trading (futures and options), STT is charged only when you sell the stock. For intraday, the STT charge is 0.025% of the total transaction price while selling.
  4. For equity Futures, the STT is equal to 0.01% on the sell-side. On the other hand, for equity options trading, STT is equal to 0.05% on sell-side (on premium).

Stamp Duty

Stamp duty is charged uniformly irrespective of the state of residence effective from July 1st, 2020. These new rates are only on the buy-side (and not on both buy and sell-side). Here are the new rates on stamp duty on different types of trades:

Type of trade New stamp duty rate
Delivery equity trades 0.015% or Rs 1500 per crore on buy-side
Intraday equity trades 0.003% or Rs 300 per crore on buy-side
Futures (equity and commodity) 0.002% or Rs 200 per crore on buy-side
Options (equity and commodity) 0.003% or Rs 300 per crore on buy-side
Currency 0.0001% or Rs 10 per crore on buy-side
Mutual funds 0.005% or Rs 500 per crore on buy-side
Bonds 0.0001% or Rs 10 per crore on buy-side

Quick Note: Previously, the stamp duty was charged by the state government and hence not similar across all the states in India. A few states charged higher stamp duty, whereas a few of them charges lower duty taxes. Different states charge different stamp duty. Moreover, Stamp duty used to be charged on both sides of transactions while trading ( i.e. buying & selling) and hence are charged on the total turnover. **This rule changed after 1st July, 2020.

Transaction Charges

  1. The transaction charges is charged by the stock exchanges and that too on both sides of the trading. This charge is the same for intraday & delivery trading.
  2. National stock exchange (NSE) charges a fee of 0.00325% of the total turnover as Transaction charges on Equity and Delivery Trading. On the other hand, Bombay stock exchange (BSE) charges a fee of 0.003% of total turnover as Transaction charges on Equity and Delivery Trading.
  3. For Derivatives trading, BSE doesn’t cost any transaction charges. However, on NSE, the Exchange transaction charge is 0.0019% for futures trading and 0.05% of total turnover for Options Trading.

SEBI Turnover Charges

  1. SEBI stands for the Securities exchange board of India and it is the security market regulator. SEBI makes the rules and regulations on the exchanges for its proper functioning.
  2. SEBI Turnover fee is charged on both sides of the transaction i.e. while buying and selling and is the same for all equity intraday, delivery, futures, and options trading.
  3. The SEBI turnover charge is equal to Rs 10 per crore of the total turnover.

Depository Participant (DP) Charges

  1. There are two stock depositories in India NSDL(National Securities Depository Limited) and CDSL (Central Depository Services Limited). Whenever you buy a share, it is kept in an electronic form in a depository. For this service, the depositories charge some fixed amount.
  2. The depositories don’t charge the traders or investors directory but charge the depository participant. Here, the brokerage firm or your demat account company is the depository participant (DP).
  3. DP acts as a linkage between the depository and the investor as the investors cannot directly approach the depository. In short, the depository charges the DP and then the depository participant (DP) charges the investors.
  4. For example, while trading with Zerodha, DP charge is equal to ₹13.5 + GST per scrip (irrespective of quantity), on the day, is debited from the trading account, i.e. when stocks are sold. This is charged by the depository and depository participant.

Goods & Service Taxes (GST)

GST is the mandatory tax levied by the government on the services rendered and is equal to 18% of total brokerage and transaction charges.

Capital Gain Taxes

Lastly, Capital gain taxes is the most important tax to understand in this article for the traders and investors. We are not going to cover all the details regarding capital gain taxes in this article, but just a short over.

  1. There are two types of Capital gain taxes in India Short-term capital gain tax and Long-term capital gain tax.
  2. When you sell a stock before one year of buying, then it is considered as a Short-term. Here a flat 15%of the profit is charged as short-term capital gain tax.
  3. When you sell a stock after one year of holding, then it is called the long-term. For the long term capital gain, you have to pay a tax equal to 10% of the gains, if it exceeds Rs 1 lakh.
  4. For Intraday Traders, they need to pay taxes on their capital gains which depends on their tax slab. For example, if you’re in the highest tax slab and made some profits while intraday trading, you’ve to pay taxes of 30% on those gains.