Impact of Discount Brokerage Firms on the Stock Market

The Indian stock market is going through a major transformation, all thanks to the rise of discount brokerage firms! As more and more people are entering into the stock market, the term "Discount Broker" has become increasingly prevalent. 

Surprisingly, over 70% of the new Demat (dematerialized) accounts initiated in both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are facilitated by these ‘discount brokerage firms’. When individuals opt to open new demat accounts, they prefer selecting the best discount brokers in India. 

Why Are Discount Brokerages Needed?
What Is Discount Brokerage?
Impact of Discount Brokerages
How Did It Begin?

• Zerodha
• Upstox
• 5paisa
• Angel Broking
• Groww

Why Are Discount Brokerage Firms Becoming the Preferred Choice for Retail Investors?
Impact on Market Dynamics
Challenges and Opportunities
Conclusion

Why Are Discount Brokerages Needed?

Discount brokerage firms help investors save big on brokerage fees, take control of their investments, and provide access to the latest information and technology to trade anywhere, anytime, and with minimal funds.

Trading with the help of the best discount brokers can lead to substantial savings, with potential reductions of up to 90% on brokerage fees. Additionally, individuals can access a user-friendly interface, real-time market data, analysis, news, charts, and key takeaways without paying much as brokerage fees.

A few years ago, trading stocks at any time or place, making payments, big trades, and figuring out brokerage and tax components before trading was tough. However, discount brokers have significantly streamlined this process, and made trading a ‘routine’ for any common man. 

"Each and every Indian is enjoying the fruit of development. So, to that extent, when we see the last few years, it is the small investors from tier 2, and tier 3 cities are joining the capital market and enjoying the growth that we are seeing in the capital market. That is something very, very important for the development of India and for the capital market," - Securities & Exchange Board of India SEBI Whole Time Member Kamlesh Chandra Varshney said in a capital markets summit in Mumbai on February 19.

Even small investors or the common man can now maintain an account, trade, invest, buy, or sell stocks daily, monthly, and annually with minimum brokerage fees. 

Top 10 Discount Brokers in India in 2024

If you are planning to invest in stocks from your home through your smartphone, here are the 10 best discount brokers to help you invest.

StartupTalkyAnamika Mahapatra

What Is Discount Brokerage?

Discount brokerage firms are like your auction assistants but with a twist – they guide you through buying or selling stocks. These firms give access to the stock exchange, just like traditional brokers, but at a fraction of the cost.

With their user-friendly platforms and affordable services, discount brokerage firms make stock trading easy and capital markets have become accessible for everyone. Discount brokers use technology to keep costs low and put the power of trading in your hands.

"The capital market too comes with inherent risks and individuals must exercise due diligence before making investments. Phones have become a convenient tool in the investment process and individual investors rely heavily on it. There is a need to enhance investor’s awareness of the risk posed by technology. Today cybersecurity and threats to tech resilience have emerged as the biggest threat in the capital markets and are giving sleepless nights to the stakeholders,” - Securities & Exchange Board of India (SEBI) Whole Time Member Ananth Narayan Gopalakrishnan said at a summit.

Unlike traditional brokers, these low-cost brokers skip the extras like investment advice and research reports. But, they're experts in technology and market trends, always staying ahead of the game. Discount brokers charge over 60% less than full-service brokers. And they give free trading software to all their customers.

Impact of Discount Brokerages

Discount brokerage platforms have significantly reformed the landscape of stock market participation in India. With their competitive pricing models and high technology, they have opened up new opportunities for retail investors like never before. 

As of December 2023, Zerodha has the largest client base with over 64 lakh clients, which is about 20% of the total Demat account holders in India. Second, comes Groww with a 53 lakh client base which is 16% of the total numbers. These figures underscore the growing popularity of discount brokerage platforms among retail investors.

These discount brokerages have empowered a new generation of investors, including millennials and first-time traders, to engage actively in the stock market. As a result, the stock market has seen a surge in retail participation, with a significant portion of trading volumes attributed to individual investors using discount brokerage platforms.

Overall, discount brokerage firm's innovative approach to pricing and technology has made stock trading more accessible and affordable, paving the way for a more inclusive and dynamic market ecosystem.

How Did It Begin?

The discount brokerage industry in India started to gain momentum in the early 2010s with the emergence of online discount trading platforms, led by Zerodha, which was the first to offer flat-fee trading services. 

Since then, several other players have joined the market. Here are some of the prominent players, who have helped the common man dive into the stock market:

Zerodha

Established in 2010, Zerodha is one of the largest discount brokerage firms in India. It pioneered the concept of discount brokerage in the country and has since grown exponentially, capturing a significant market share with its low-cost trading platform and innovative offerings.

"We just introduced two new cool features on @zerodhaonline Console: Timeline and Stock Insights, both powered by @Tijori1," Zerodha online CEO and Founder Nithin Kamath said in a tweet on February 13.

Upstox

Upstox (formerly RKSV Securities) is another leading discount brokerage firm known for its low brokerage fees, advanced trading platforms, and robust technology infrastructure. It has gained popularity among retail investors for its user-friendly interface and competitive pricing.

5paisa

Launched in 2016, 5paisa is a disruptive player in the discount brokerage space, offering a wide range of financial products and services at competitive rates. With its emphasis on digital innovation and customer-centric approach, 5paisa has emerged as a formidable competitor in the market.

Angel Broking

While traditionally a full-service brokerage, Angel Broking has adapted to the changing market dynamics by introducing discount brokerage services under its Angel Broking Prime brand. It offers discounted brokerage plans and advanced trading platforms to cater to the evolving needs of investors.

Groww

Groww is a fintech platform that started as a mutual fund investment platform but has since expanded its offerings to include discount brokerage services. With its user-friendly interface and zero-commission trading model, Groww has attracted a growing base of retail investors.

These discount brokerage firms, along with others in the market, have disrupted the traditional brokerage model by offering low-cost trading solutions, innovative technology platforms, and a customer-centric approach. Their emergence has widened stock market participation, empowering retail investors and challenging established players in the industry. 

Here are the key differences between traditional brokers and discount brokers:

Why Are Discount Brokerage Firms Becoming the Preferred Choice for Retail Investors?

1. Low-Cost Advantage: Discount brokers offer the lowest brokerage charges compared to full-service brokers. This cost-efficient model allows traders to convert trades into profits with a lower Break-even Point (BEP), making investing more accessible to a wider audience.
2. Online Trading Terminal: One of the hallmarks of discount brokerage firms is their centralized online trading terminals. These platforms provide investors with user-friendly interfaces and real-time market data and analysis, empowering them to manage their investments wisely and efficiently. Moreover, these services are often provided free of cost, enhancing the overall trading experience.
3. Unbiased Offerings: Regardless of the investor's size or investment portfolio, discount brokers provide equal access to securities. This unbiased approach ensures that all clients have access to the same investment opportunities, leveling the playing field for both individual and institutional investors.
4. Low Transactional Costs: Discount brokers leverage their high trading volumes to offer lower transaction costs to clients. This cost-saving benefit enables investors to execute trades more frequently without incurring substantial fees, thereby maximizing their long-term potential returns.
5. Transparency: Transparency is paramount in the discount brokerage model. These firms offer clients 100% transparency in their costs, providing access to brokerage calculators, margin calculators, charges sheets, and trade confirmations. This transparency fosters trust and confidence among investors, more retail participation, and enables them to make informed and unbiased decisions.
6. Client Education: Education is key to success in the stock market, and discount brokerage firms recognize this. They offer a wealth of online educational resources, including video tutorials and market insights, to empower clients with the knowledge needed to navigate the financial markets effectively.
   For Example: Zerodha Varsity stands out as a market leader in investor education, offering a comprehensive collection of financial resources. Similar to Zerodha Varsity, Upstox Learning Centre is dedicated to providing fundamental lessons to investors. Groww's Blog is another platform that pursues a similar strategy of educating investors by offering insightful articles and market analysis.
7. Financial Education: In India, financial literacy is very low. People are hesitant to invest in the stock markets, they usually prefer investing in traditional investment tools like the fixed deposit and provident funds. But brokerage firms have broken this norm and addressed the status quo, by providing comprehensive educational resources and empowering users with valuable knowledge.
   These platforms are transforming the way investors approach the markets. With access to these educational platforms, investors can equip themselves with the skills and insights needed to navigate the complexities of the financial world confidently.
8. No Misleading Practices: Unlike some full-service brokers, discount brokerage firms refrain from setting brokerage or third-party product sales targets for their employees. This commitment to integrity ensures that clients receive unbiased advice and recommendations tailored to their individual investment goals.
9. Paperless Account Opening: With the convenience of Aadhar Number verification, discount brokers offer seamless and paperless account opening processes. Investors can open online trading accounts in a matter of minutes, eliminating the need for cumbersome paperwork and expediting the onboarding process.
10. No Minimum Brokerage: Unlike full-service brokers, discount brokerage firms do not impose minimum brokerage charges. This means that even investors trading in penny stocks or smaller volumes can benefit from the low-cost advantages offered by discount brokers.
11. Flat Brokerage Charges: Discount brokers charge flat brokerage fees, such as Rs 20 per trade (Zerodha's leading discount brokerage charges for Futures & Options), irrespective of the trade volume. In contrast, full-service brokers typically charge based on a percentage of the trading volume, resulting in higher costs for investors.

The drive for financial inclusion in India, the digitalization of the economy and the emergence of discount brokers have led many people to opt for fishing in the stock market. The surge in Demat account registrations has been propelled by the competitive brokerage rates and streamlined onboarding procedures facilitated by digital brokerage platforms. 

The digital economy's share of India's GDP has grown significantly, rising from around 4-4.5% in 2014 to a projected over 20% by 2026.

Currently, only about 7-8% of Indians have Demat accounts. The number of Demat accounts has increased to 14 crore accounts as of January 2023. Finance experts are of the view that the number of Demat accounts in India will cross the 25 crores milestone by the year 2030.

In December 2023, there was a surge in new investor accounts, with nearly 4 million opened with the Central Depository Services (CDSL) and an additional half a million with the National Securities Depository (NSDL), it reflects a notable increase in interest and participation in the stock market.

"India is the fastest growing economy in the world. Our capital markets are also performing well. We exceeded the $4 trillion market cap for NSE. And the number of Demat accounts has grown up to more than 14 crores. It is important to become prosperous, not only in our immediate future but in the long-term we invest in the market infrastructure, and provide opportunities for all citizens in our region to reach their potential. The retail participation from urban and rural India in capital markets has been growing strongly with more and more SIP (systematic investment plan) accounts as well as direct investments clearly indicating the growth of the economy,” said Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey said in an Assocham event on February 19.

Overall, discount brokerage firms have emerged as a game-changer in the world of investing, offering cost-effective solutions and empowering investors to take control of their financial future. 

Impact on Market Dynamics

The influx of retail investors facilitated by discount brokerages has significantly altered market dynamics. Increased retail participation has led to heightened trading volumes and market volatility, influencing stock prices and the overall market sentiment. 

With the help of low-cost brokerage firms, more people are starting to invest in the stock market. This is happening for a few reasons. First, there aren't as many good places to save money anymore, and interest rates are meager. 

Furthermore, the democratization of investing has empowered individuals from diverse backgrounds and mindsets to engage with financial markets, fostering a more inclusive and dynamic trading environment.

Challenges and Opportunities

While discount brokerage brings undeniable benefits, it also presents challenges and opportunities for market stakeholders. Traditional brokerage firms are forced to adapt or risk becoming obsolete in the face of intensified competition. Regulatory bodies must navigate the evolving landscape to ensure investor protection and market integrity. Meanwhile, innovative fintech startups are seizing the opportunity to disrupt the market further, introducing novel technologies and services to cater to evolving investor needs.

Conclusion

The impact of discount brokerage on India's stock market is undeniable, with far-reaching implications for investors, market participants, and regulatory bodies alike. As the industry continues to evolve, stakeholders must embrace change and seize the opportunities presented by this transformative shift. With innovation and adaptability, India's stock market is primed to thrive in the era of discount brokerage.

Key Takeaways

• A discount broker is a stockbroker who carries out stock transactions (buy and sell orders) with less or no commissions.
• Discount brokers do not provide the personalized investment advice or guidance provided by a full-service broker.
• Discount brokers offer low-cost trades, online account management, research tools, and educational resources.
• Discount brokers comprise a large section of the fintech industry.

Don’t think too much…join the revolution and start trading smarter with discount brokerage firms today! 

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