HomeStock MarketCan brokerage rates in India dip to zero? Zerodha's CEO Nithin Kamath...

Can brokerage rates in India dip to zero? Zerodha’s CEO Nithin Kamath answers

Zerodha’s CEO and co-founder Nithin Kamath has something important to say on the brokerage rates in India. According to him, the brokerage charges may go up in the future. The same applies to the shares. Kamath took to Twitter on Wednesday and answered some important questions related to India’s brokerage future. It becomes imperative for anyone to pay all kinds of feeds and charges when trading in the stock market.

Nithin Kamath on brokerage rates in India

Here is what Kamath said in one of his tweets, “Many people ask me if brokerage rates can go to zero like in the US, and why not flat monthly brokerage plans with unlimited trades.” He also gave multiple reasons for the brokerage rates going up in the future. According to Nithin Kamath, India is by far the best-regulated market in the world. That applies in terms of investor protection. He also wrote, “I had written this post a couple of years back on why brokerage rates in India can probably never to zero because there won’t be other sources of generating revenue like in the US.”

He further tweeted, “A flat monthly fee model doesn’t make any business sense. Many have tried and reverted. We started with a flat fee per order because effort involved doesn’t go up with the size of the order in an online world. But effort involved does go up when a person trades once vs many.” The Zerodha CEO said that brokerage is like an insurance business. It collects small premiums (brokerage) but incrementally takes risks with every trade.

Kamath further said, “Stock purchases don’t have a risk since 100% of the money is collected upfront, but all speculative leveraged trades do. The business having to earn a profit to be sustainable, there also has to be a risk compensation to cover black swan events. One event like crude going negative (Apr 2020) can wipe out years of premiums or brokerage collected.”

Reasons behind increasing brokerage rates in India

  1. Brokers in the US can earn in a way that is not allowed by SEBI in India.
  2. Payment for the order flow is to sell customer orders to the HFT firms.
  3. Stocks are usually held in the name of brokers or the street name. In other words, they can lend them for better earnings. This situation is unlikely in India.
  4. India has a concept of float income. So, the unutilized funds are always transferred back to the customers. However, the funds remain with the brokers in the US. Not only do they earn interest but also use the same for the working capital.

What does brokerage do?

The main purpose of a brokerage is to provide intermediary services in various services. The best examples among them are investments, loans, purchasing real estate, etc. The intermediary who connects a buyer and seller to facilitate transactions is the broker. Both legal entities and individuals can work as brokers. Meanwhile, the stockbrokers are licensed to buy and sell stocks including other securities through the stock market exchanges.

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