Business Finance

What is Brokerage in Stocks, and How is it Calculated?

What is Brokerage in Stocks, and How is it Calculated?

We know that middlemen cost us, but you know what else is an add-along with that? It is that they make things so much easier than they actually are. Just imagine living in a world where there are no banks (banks being the middlemen for fund transfers). How would we transfer money from one person to another? Get to where they are with a case of money like a movie from the 80s? Well, you know what? Though the bank would charge you a little something – it did save you so much time, expenditure traveling, and also the most important thing, your energy. 

This is exactly what a brokerage does for you. But, let’s not leave it there – let us discuss it in-depth and also understand it right from scratch, shall we?

Who is the Broker?

A Broker performs a vital job in the stock market. A broker would execute transactions like the buying and selling of the stocks on behalf of their clients. In return, they would charge a brokerage commission. But, a stock market broker gives various other services too. 

They are inclusive of portfolio management and financial advice is. With the stock market transactions happening online, the broker would also allow multiple platforms through which the investors and traders could access the stock market.

Does a broker charge you? Honestly, how is a broker supposed to make any money if they don’t do it right? So, yes, a broker charges you, and that is what is called the brokerage. You could always use a brokerage calculator to know how much you would be charged, but before you just dive into the solution, you would want to know the whole concept, so you are consciously conscious of your money. 

The Relationship Between you and your Brokerage House Would Be

Back when the stock exchange was a physical venue, a brokerage firm would represent the client on the exchange floor. As legal representatives of their customers, they would carry out buy and sell orders according to the client’s instructions.

A broker is a registered member of the stock exchange. And also, they would have to oblige with all of the regulatory guidelines imposed by the market regulator and SEBI.

Well, today, in India, there are dematerialized stock markets where trades are executed online. A stockbroker would still carry out the same primary function, executing orders on their client’s behalf. Today – they have all moved to digital channels.

What does a broker do?

A broker would execute orders for their clients. And for this job, they would charge their clients a brokerage fee known as commission. It may be either a flat fee for a transaction or a percentage of the transaction value.

They have multiple trading platforms through which the clients can place orders. Big brokers in town give trading applications and software for smartphones, laptops, and more. 

New investors and professionals depend on stock recommendations from their brokers. But, here, the stockbrokers need to disclose all the information when recommending a stock that is inclusive of being transparent about the risks.

A trader that has accounts with large brokerage funds could use margin funding facilities. It essentially refers to borrowing funds from the broker to take bigger positions in the market. 

Let us get going on the charges of a brokerage. 

Understanding Brokerage Charges

You need to remember that a brokerage charge needs to be paid on both – while buying an ad while selling a share. You would find some brokers who have some exceptions to this, and they may charge you only once – that is, either while buying or while selling. 

If you have been wondering how to calculate your brokerage charges, here is an example that would clear things out for you.

How to Calculate Brokerage Charges

Here is a demonstration of how to calculate brokerage with an example. 

Just say a broker charges you 0.05% on day trading. It means:-

The brokerage charge is 0.0% of the whole turnover. Supposing the stock that you buy costs you 100 rupees, the brokerage charge is 0.05% of the 100 rupees. Then, your total brokerage charge would be 0.05% and 0.05%, that is, 0.10 rupees. 

Now, the brokerage is calculated on the total cost of the shares at the percentage that has been decided on. So, the formula for this would be as mentioned below:

  • Day Trading brokerage = Market Price of a share*number of shares*0.05%
  • Delivery Brokerage = Market Price of a share*the number of shares*0.50%

With the number of new investors coming out every day, the competition with brokers has been increasing, and the charges are also getting very affordable.

Tips to the Investors

After you’ve chosen your broker – you need to make sure that the brokerage the broker applies on your transaction does really match the offer that was agreed upon. You also have to know the brokerage that has been applied at periodic intervals. 

Conclusion

There are varied brokers out there for you now. So, the options you have are a lot. But, it comes down to choosing the firm that is the best for you. So, keep your chin up for all of the research that is needed.

About the author

Ariaa Reeds

Add Comment

Click here to post a comment

Your email address will not be published.

Subscribe us

Please wait...
Want to be notified when our article is published? Enter your email address and name below to be the first to know.