Common Financial Terms & Concepts

What is Brokerage Fee? Meaning, Types, Plans & Examples

In any transaction, there is always a middle man that needs to have their fair share of the profits. But in the world of stocks and shares, the middle man is the **\broker** that takes their fair share of the services they have to offer. For those wanting to learn more about brokerage, then let's dive deeper into the world of brokerage and understand it extensively.

What is a Brokerage Fee?

The brokerage fee is the fee collected by a broker in offering specialized services. These services include delivery, purchasing, sales, consultations, negotiations, and more related to the stock market universe. There are different brokerage fees taken in various fields, such as real estate, financial services, delivery services, insurance, etc.

Brokerage Fee: How it is calculated?

The fee of brokerage often differs significantly from one party to another. Most of the time, the fee is capped at 1% to 2% of the transaction fees. But based on the industry and the company associated with a brokerage, the rates vary significantly.

Brokerage Fee Examples

Here are some basic examples to examples to understand how brokerage fee is calculated.

Example 1:

To understand the calculation of how the brokerage fee is assessed, we have an example. Let's say you purchase 1000 shares at 150 rupees per share from company XYZ. The brokerage cost is capped at 2%. The cost of buying the shares is given as follows.

Cost: Rs. 150 * 1000 shares = Rs. 1,50,000 

Brokerage Fee: Rs. 1,50,000 * .02 = Rs.3,000 

Total Purchase Price = Rs. 1,53,000 

Example 2:

But in the coming months, you feel like selling all the shares. Its where another brokerage fee would be applicable. Let's say that company XYZ has its shares trading at 250 rupees per share. The net sale calculation with brokerage fees is given as follows.

Sale price: Rs. 250 rupees * 1000 shares  = Rs. 2,50,000

Brokerage Fee: Rs. 2,50,000 rupees * .02 = Rs. 5,000 

Total Purchase Price = Rs. 2,45,000 

It's how brokerage fees are calculated. Though in most of the scenarios, the cost for buying and selling of stocks might remain the same, but companies often charge them differently depending upon the transaction. Its where reading the fine print in the brokerage agreement letter comes handy.

Most of the investors calculate their profit incurred in the above-given transaction as 1,00,000 rupees. But the correct profit incurred should include the expense of brokerage fees as well, which is 2,45,000 – 1,53,000 = 92,000 rupees.

Types of Brokerage Fee:

A stock broking firm can charge the following types of brokerage fee:

1. Full-service Brokerage Fees.

As the name suggests, full-service brokers include a lot of services. These services include tax consultation, estate planning, and much more. Any consultation or financial planning can be addressed either through a one-on-one meeting or over a phone call. It's the heaviest brokerage fee of any company or broker. Typically, the fees range from 1% to 2%. The full-service brokerage fee is relatively higher as compared to fee charged by discount brokers.

2. Online Brokerage Fees.

Out of the lot, this type of brokerage has the lowest fees and are the most affordable brokerage services. The communication medium is online, with limited interaction with the broker. Also, there are limited transactions per trade. The fee is charged on account maintenance.

3. Discount Brokerage Fees.

Due to their narrower offerings and limited investment or financial advice, they are comparatively cheaper than full-service brokerage. Often, their rates are a flat rate capped at 10-20 rupees per trade. The account maintenance fee is around 0.5% only. This may vary from broker to broker.

Brokerage Plans: Most Common Types

For those wondering what the brokerage plans that are available in India? Then they are as follows.

1. Flat per trade Brokerage

In this type of account, the charges aren't imposed on the volume of trade, but a fixed specific amount. At times, it could prove beneficial, but most of the time, it becomes a costly venture. Mostly, it's ranges from 10-20 rupees per trade.

2. Monthly Unlimited trading plans

There is a fixed monthly cap that has to be paid to trade in securities and stocks. These prices range anywhere between Rs. 800 and 999 per month. These could also vary based on the broker you have chosen.

Reduction of Brokerage fees:

Investors and traders can reduce the fees by limiting the services offered by brokers. Every broker has a basic plan that can be altered to suit your trading preference. It's an important gesture to go through the terms & conditions/plans with the broker while finalizing your brokerage plan.

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