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Definition: Brokerage Fee
A brokerage fee is the fee that is paid to a broker for performing a transaction. The brokers might be dealing in online trading, negotiations, delivery services, housing and property deals or advice on the transactions.
Consider there are 1000 shares of a company that the trader would like to purchase at Rs. 50 per share. If the broker charges 4% of the traded value as brokerage fee, the transaction cost would be:
Rs. 50*1000 shares= Rs. 50,000 plus Rs. 50,000*0.04= Rs. 2, 000 (addition because fee charged is also added to the cost of purchasing the shares)
The total transaction cost would be Rs. 52,000
In case these shares are to be sold and it is worth Rs. 75 per share, then the transaction cost would be:
Rs. 75*1000= Rs. 75,000 minus Rs. 75,000*0.04= Rs. 3, 000 (subtraction because fee would be charged from the profit)
The total transaction cost would now come up to Rs. 72,000
The total profit from this transaction would be 75,000 - 50,000= Rs. 25,000 i.e. 50% if there was no brokerage fee.
But, with the brokerage fee, the total profit would be: 72,000 - 52,000 = Rs. 20,000 i.e. 38.4%
This means that about 11.6% of the profit is brokerage fee which is loss to the trader.
There are three types of paying a brokerage fee. Consider the example of online trading:
a. Payment as the Trading occurs:
The fee is paid as a percentage of the trade that the trader does. Consider the example of a broker who charges 0.3% for trading. This means that for every Rs. 100 worth shares that are being traded, 30 paise is charged as brokerage fee.
There might be an option of some minimum amount of fee till a pre decided number of shares. Say, Rs. 40 for the first Rs. 75, 000 worth shares. After this amount, the 0.3% fee comes into picture.
b. Prepaid Fee
A pre fixed amount is paid in advance to the broker in order to trade. This might even have a validity time. But, the more amount that is paid in advance, the lower would be the overall fee. Consider the example where Rs. 5000 is being paid in advance. This means that the brokerage fee might reduce to 0.05% instead of a high 0.3%.
c. Fixed Fee
This concept is different from the prepaid fee because a fixed amount would have to paid at a time to the broker. That is, the size of trading is not important.
If there is a trade of only one share during the day and a fee of Rs. 1000 had to be paid, this means that the brokerage fee is unreasonably high. This method is used only by traders who deal in large amounts and feel this payment would reduce their fee instead of a ‘Payment as the Trade occurs’ option.
Different brokers charge different fees. So, depending on the requirement, selecting the right method and the right method is essential to obtain profits.