Today, investing in markets has become like just another transaction in the digital world. Gone are the days when people had to fill up a large number of forms. The very idea of filling up forms and lack of adequate understanding of long-term benefits of investing in markets were enough for people to stay away from investing in markets. But, today, you take a few steps and your journey in markets begins swiftly. You download an application of a broker, upload mandatory documents, complete the KYC, and link your bank account. With the help of three accounts—broking, demat and bank accounts, you place orders, hold securities and fund your trades respectively.
More so, technology has created a more egalitarian atmosphere in markets. Today, any investor whose investment profile complies with the rules and regulations in markets has equal opportunities of earning money in markets. Investor-friendly regulations of markets have also ensured that making money in stock markets is not limited to a certain class of people. Even individuals from tier-II and tier-III towns have opportunities to make money from investing in markets.
Besides technology, the increasing role of discount brokers in convincing and providing confidence to individual investors to invest in markets has brought in level-playing field in markets. Today, discount broking model has made traditional brokerage houses rethink about their business model. Some full service brokers also embraced this discount broking model and tried to expand their business. Given these facts, many a time, investors are confused in distinguishing services offered by a full service and a discount broker. Let us understand a few nuances which distinguish them:
Research and other inputs
Full service brokers typically have in-house research teams. They generate investment and trade ideas based on fundamental, technical and quantitative research. Traders and investors are fed information. Full service brokers also have product research. These professionals offer research reports about investment products such as mutual fund schemes, insurance schemes, or bonds.
A discount broker does not offer such research calls. Most of the clients at a discount brokerage know how to trade and invest. Even for ‘new’ investors, discount brokers invest a lot in educational content and tech-enabled tools that offer ‘processed information’ for investor. For example, a discount broker may offer a trading application which provides various screeners based on technical and fundamental factors.
Human handholding
Many full service brokers have a phygital—combination of physical and digital—infrastructure. These brokers have branches or service counters in many cities. Clients can walk in those branches and ask for some help. Relationship managers are appointed to service clients. These brokers may also help many ancillary services such as portfolio management services, tax planning, tax-filing, financial planning through their sister concern or by tying up with some firms. Relationship managers are there to handhold old and new clients.
A discount broker rarely relies on physical infrastructure. The idea is put in place a good trading platform backed by the best of technology and let traders use it. Human involvement is minimal. There are call-centers to answer your queries on operational issues. But, there are no research inputs to be sought there.
Technology
Many full service brokers invest significant amount of their resources in technology and tools that empower traders. However, for some still there is scope for improvement. A discount broker, on the other hand, has no option but to ensure that trading platform and technology used are top-notch. This is because discount brokers invest a lot in technology and tools. And they are much ahead of the curve in introducing new facilities and applications for their clients.
Costs
Given the nature of the business, full service brokers charge more than discount brokers. Many full service brokers charge brokerage as a percentage of a transaction value. In good old days, it used to be as high as 2.5%. It has over a period of time has come down. But even now they charge brokerage at a rate - of 10 paise per 100 rupees to 25 paise per 100 rupees. For intraday trades they charge only one side of the trade and the rate of brokerage is lower. Since the brokerage is charged on the transaction value, the brokerage payable in absolute terms is high. For high frequency low profit margin traders this may not be too attractive. This cost structure is expensive when you are trading in derivatives. Full service brokers charge brokerage per lot – say Rs 10 to Rs 30 or even higher in some cases.
Discount brokers charge a flat fee- say Rs 20 per order. This keeps a cap on costs. This is irrespective of how many shares you trade and how many lots of futures you trade when you place an order. Even volume does not matter. This is a big differentiator and puts discount brokers ahead of full service broker.
Lastly, it has been observed that traditional investors who want research inputs and very high networth individual investors who require some amount of handholding and trade ideas approach full service brokers. On the other hand, traders who understand financial markets and place their trades typically do well with discount brokers. Many new investors keen on ‘do-it-yourself’ approach also open their trading account with discount brokers.
These factors show how full service brokers and discount brokers differ from each other. Hence, it is important that investors must keep in mind these aspects before approaching these two kinds of brokers.