Differences between traditional brokers and discount brokers

We’ve previously discussed the importance of a trading account to buy or sell securities. We’ve also discussed the need for a demat account for holding on stocks, shares and other securities. Does that mean a combination of these two should cover your trading needs? Not quite.

Key Points

• A brokerage is an intermediary institute that facilitates your transactions when dealing with securities i.e. stocks, mutual funds, ETFs, etc.
• A brokerage firm will take your buy and sell orders and give you recommendations on particular stocks.
• Discount brokers offer far lower brokerage rates and deliver high-speed trading in stocks, commodities and forex.

As per SEBI guidelines, all trades on stock exchanges must be routed through a Member of the Exchange - a brokerage house. A brokerage house a.k.a broker is an institution, an intermediary, that facilitates your transactions when dealing with securities - like stocks, mutual funds, ETFs, and others. Brokerage firms help you with your transactions, give you investment guides, tax-saving recommendations, retirement planning advice, and deliver asset management services. They will guide you through all the requirements for investing in the stock market.

A brokerage will take your buy and sell orders, give you recommendations and deliver research on a particular stock for you. Brokerage firms are often inaccurately termed stock-brokers as well.

Primarily brokers are of two types - traditional or full-service brokers, and discount brokers.

Interesting Fact: Stock Broking in India traces its roots to 1875, when 318 stock brokers formed the Native Share & Stock Brokers Association, now known as the Bombay Stock Exchange (BSE)

Who are traditional or full-service brokers?

A traditional broker provides a large variety of services to its clients - such as trading (stocks, commodities, and currency), advisory, research, asset management and retirement planning. A traditional broker usually allows trading of different financial instruments - forex, mutual funds, pension plans, insurances, bonds, IPOs and FDs.

Traditional brokers come with a steep operating rate, due to these extra facilities. The commissions charged by them are significantly higher than discount brokerages. This could eat up your profits in the long run, especially if you trade multiple times during a short time frame. If your budget for brokerage is high and you have the resources to find someone to take care of your money and investments, a traditional or full-service broker might be a right choice for you.

Who are discount brokers?

On the other end of the spectrum, a discount broker offers essential services - like carrying out buy and sell orders. At the same time, their low operating costs enable them to divert resources to their technology. This translates into fast, smart and cutting-edge technology available for a low cost to the trader. The cost of full-time advisory services and investment ideas is non-existent. Instead, they spend on software enhancements to provide real-time data on different platforms such as desktop, web and even mobile. They offer you services at very competitive and attractive rates.

Advantages of traditional brokers

While they are expensive, traditional brokers claim to offer a certain set of advantages:

• Research: Traditional brokers will deliver detailed research on stocks and market outlook. The significance of these reports however, is debatable, especially in today’s internet age, where similar information is available to the masses for free.
• Recommendations: All sorts of recommendations including investment and diversification ideas, retirement plans, and tax-saving guides come from traditional brokers.
• Additional Services: Traditional brokers claim to provide extra services such as commodities, currency trading, advisory, research, asset management and more.

On closer inspection, you’re likely to observe that the ‘advantages’ may not offer true value. Research reports are available from hundreds of reputed sources online now thanks to the internet. Information is no longer the monopoly of traditional brokerages.

Advantages of discount brokers over a traditional broker

Traditional brokers charge a hefty sum for their services which can end up eating into your profits - which can look much worse if you begin to doubt the value their services are adding to your portfolio. Discount brokers are ideal for new or small investors for a variety of reasons, and are in fact, driving many first time investors into the markets. Discount brokers reduce the market entry barriers. More newbies and millennials are entering the dynamic world of share markets thanks to easy points of entry.

• Zero/Low Commissions: Discount brokers will carry out your buy-sell orders at a very low commission rate.
• Powerful Analysis Tools: Discount brokerages offer more than 100 charts and other tools to smartly analyse your stocks and trade intelligently and independently.
• Time and efficiency: Discount brokers offer an efficient and time saving approach to trading. Time is everything in the markets. With innovative and fast platforms, you can place and execute orders instantly.
• Better Tech: Discount brokers are more likely to be in sync with new technologies - such as paperless account opening processes that eliminate paperwork and reduces costs.

Once dominated by traditional brokers, the industry is now being challenged for domination by new age discount brokers - who deliver far more bang for your buck. If you have limited time to spend on your investments and other monetary plans, a traditional broker may be a better choice for you. But for all other cases - especially if you are a frequent trader and trust your investment ideas, a discount broker is ideal. Open a demat account with Upstox now.

Wrapping Up

• In addition to a demat and trading account, a broker is essential to place trades on the stock market.
• Traditional brokers offer detailed research reports and services, but charge a significantly higher fee.
• Discount brokers charge very low fees, while simultaneously offering fast trading platforms and all essential services.
• Your choice of a broker boils down to how much you value your independence and freedom while trading.