The Impact of Zero Brokerage on Long-Term Investment Strategies

The rise of “zero brokerage” as a concept has completely revolutionised trading and investment in India in recent times. Historically, when an investor buys or sells a security in the market, he has to pay a brokerage fee to the broker with whom he has opened a demat account.

This works in a simple manner – the higher the number of trades, the more the brokerage payable by an investor to a broker. As a result, many people do not like to participate in the market and they do not open a demat account.

This is the reason many stockbrokers and broking apps have started offering zero brokerage to their clients. How does the zero-brokerage model work? When you open a demat account with zero brokerage, you do not have to pay a brokerage fee to your broker.

No matter how many times you buy or sell stocks, you do not have to pay a fee per transaction to your broker. Besides, you can hold a security for as long as you want. There is no brokerage fee for holding a security, either.

Typically, people think that zero brokerage benefits only traders, as they buy and sell shares frequently.

How can zero brokerage help long-term investors?

• Higher returns over the long run –When an investor buys a stock for the long run, he ends up holding it for at least a year. At times, investors park funds in a stock for decades. If they do not have to pay brokerage, needless to say, they will save money. The money thus saved can become a significant amount over a long period due to the power of compounding. Hence, the zero-brokerage model can be extremely beneficial for long-term investment.
• Frequency of buying can increase –Suppose you find a stock that can provide you a significant return over a long period. If you have to pay a brokerage fee for buying it, then it may limit the number of times you will buy a share, particularly if you are tight on funds. However, if you do not have to pay brokerage, you can invest whatever money you have to buy this stock. Hence, you will be able to buy the stock more frequently than when you have to pay brokerage for it.
• Fundamental analysis can be more effective with zero brokerage – When you perform fundamental analysis to buy or sell a stock, your decision depends upon the fundamental performance of a company. However, if you have to pay brokerage on your transactions, then it interferes with the decision-making. But when you do not have to pay a brokerage fee, then your decision to buy or sell is purely a function of the fundamentals of a company. Hence, with the zero-brokerage model, fundamental analysis can be more effective.

Conclusion:

The zero-brokerage model, which is offered by many broking apps, can be beneficial for both new and experienced investors. Those who have just begun to invest feel particularly encouraged when they do not have to pay a fee for every transaction they make. Besides, even experienced investors understand that the zero-brokerage model can help amplify their returns over a long period.

Sources:
a) https://economictimes.indiatimes.com/markets/stocks/news/revolutionizing-investment-landscape-the-rise-of-zero-cost-broking/articleshow/104006428.cms?from=mdr
b) https://www.livemint.com/market/how-can-investors-benefit-from-zero-charges-on-broking-we-explain-151688381004854.html