Your Stock Broker will never say these Hidden Charges.
The investment through the stock market has fascinated many investors especially high-risk appetite investors in India recently. According to the most recent data of SEBI, the number of Demat accounts opened in 2018 has increased by 13% from the previous year.
More households in India began to prefer the stock market investment instead of traditional instruments such as gold, real estate, and bank deposit. Especially the young generations in India prefer stock market investment strategically through algorithm trading.
In India, it is not even 5% of the total population having a Demat and trading account. It is mainly because of its complexity in nature, the risk involved, and the lack of knowledge. And that is why many investors give the trading authority to their relationship managers / Authorised Person to trade on their account. And the investors remain ignorant about their trades and other charges.
Selection of Stock Broker and to know Hidden charges
If you have a trading account with a Stock Broker, or with a discount broker and if you are thinking there are no other charges except brokerage then you are wrong. There may be some hidden charges which your Stock Broker has not revealed at the time of account opening. Yes, we will discuss those hidden charges in this article.
Investors whose accounts are maintained by their relationship manager or Authorised Person (AP) are least bother about their brokerage and other charges. There are many relationship managers/APs actually generating two/three times brokerages from the capital invested by their clients and meeting their own targets.
In such cases, the brokers and Authorised person are only benefited most of the time. They get their commission but the client gets nothing at the end of the day. Ultimately after a few years, the client gets frustrated by the stock market investment and park their funds in other instruments. This is one of the main reasons why in India stock market investment is not popular in India.
Your Stock Broker selection matters
A Stock Broker is an intermediary between exchanges and clients to execute all transactions done by the clients. Basically, a Stock Broker is a one-point contact for clients of all sorts of investment solutions. There are two types of Stock Brokers firstly the old and orthodox model full-service brokers and secondly the new model discount brokers.
The discount stock broker has got popularity in India since the last decade. Earlier the only option for investment services was though the full-time Stock Broker. Choosing the right stock broker for your investment need is not an easy task particularly when there are many options available.
Investors should always choose a Stock Broker as per their own investment needs. You should not select a Stock Broker based on other’s recommendations. Just for an example. If a day trader is recommending an “XYZ” Stock Broker it may not suitable for you if you are long term investors.
Similarly, new investors should select a Stock Broker who can give full service and do hand-holding. And in case of experienced investors, they should go for a discount stock broker with no hand-holding service. You can go through the article “how to choose a Stock Broker” for more details on the selection of a right stock Broker
What is Hidden Charge
While opening a trading account with a Stock Broker, normally the charges that explained to us are Brokerages, Statutory charges, Demat AMC and Account opening. Other than these basic four charges there are few more charges which normally Stock Broker don’t explain either the client asks for.
And later when we see these extra charges are levied on our ledger account we think that these are hidden charges. Stock Broker should be transparent and explain properly all charges to their clients. That is why the selection of the right Stock Broker is very important. Let us know what are the hidden charges which normally Stock Broker don’t reveal to their client
What are the Hidden Charges and how to avoid
The minimum brokerage charge in Penny stocks
While opening a trading account with Stock Broker clients normally negotiate the brokerage rate but ignores the “minimum brokerage” rate. A minimum brokerage rate is normally used in penny stock or the low value of stocks which are less than Rs30.
For e.g if you are buying a stock say the price of which is Re 1 and your stock broker charge you a minimum 0.10p for that stock, it means you are paying 10% to the broker. So next time you must ask your broker the minimum brokerage charge for penny stocks or low-value stocks.
Both side brokerage charges
Whenever a client opens a trading account with a Stock Broker, the broker never reveals whether the intraday brokerage is for both buying and selling or only one side. It is very important for the client to clarify the charges before starting trading on their account.
Nowadays in India Stock Brokers are charging only on one side in intraday trading. So clients should negotiate and clarify at the beginning itself otherwise it would become hidden charges later.
Other Charges in your contract note or bill
Sometimes the broker keeps their brokerage less and increases the other charges in the bill. It has been observed that when a client wants to clarify the other charges their back-office staff never comes back. It is very important to check the bill cum contract note after the first trade and check all the statutory and other charges.
Nowadays the broking business has become very competitive. The client can ask the bifurcation of all statutory charges including the other charges from the Stock Broker. After getting clarification of all charges then only the client should trade further.
Demat AMC or sell charges
The Demat Annual Maintenance Charges (AMC) charged by the broking companies are having various structures. They have various plans to offer to their clients like Free AMC, 1st year Free AMC, High transaction DP AMC, Low transaction AMC, etc. One needs to clear the Demat AMC and selling charges while opening the account.
Stock Brokers annually review their Demat AMC charges and their annual plan. They sometimes increase Demat AMC charges for existing clients too. The revised Demat AMC plan can actually pinch the existing clients to pay high AMC charges.
The relationship manager or Authorised Person will not explain this revised charges. The client needs to clarify this revision of Demat AMC charges with the representative of a Stock Broker. If it is not clear in the beginning then maybe after one year these charges will become hidden charges.
Off-market transfer charges
This is another Demat related charge mostly used when you have a large number of scrips and you wanted to shift to another broker off-market. Normally investors don’t ask off-market transfer charges to the Stock Broker at the time of account opening.
There are a few Stock Broker charging Rs 100 per scrip from a client for off-market transfer. For example, say if you have 60/70 scrips in your Demat account. Then you need to pay a heavy amount to transfer the scrip to a new Demat account. The broker charges off-market charges per scrip irrespective of the number of shares.
It is always better to clarify this kind of charge at the beginning itself. There are also few Stock Brokers they charge around Rs 25 per scrip, the client can also negotiate with the broker at the time of account opening to reduce the charges.
Delay charges T+1 day
The terms like late payment charges, delay charges or penal charges are all the same. Though nowadays SEBI put restriction that you can’t keep debit in your broking account but still you can do it by paying interest for a few days.
There are few broking companies that allow their clients to hold debit in their account for 7 to 30 days. Some brokers are charging fees from the 2nd day itself and some are charging after 7 days. The client should clarify the delay payment charges at the time of account opening otherwise will have to pay more.
How to take care of these hidden charges
Above are the charges which the representative of Stock Brokers doesn’t explain it may be intentionally or unintentionally. Whatever may be the reason if a client comes to know any of the above charges which were not discussed earlier at the time of account opening are hidden charges.
Normally the above six charges are not clarified with the clients prior to opening the trading account by brokers representative. Which later becomes an issue for both parties when it revels. Now as you know about the hidden charges, you can become cautious and clarify with your brokers in advance.
Conclusion:
The above article is based on our personal experience. We have experienced with various Stock Broking Companies practically seen client-facing such issues. Sometimes clients also fighting on the above issues and calling it a ‘Hidden Charges’.
We are just creating an awareness among all investors to be cautious and clarify on the above charges well in advance.
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