How to Calculate Brokerage in the Share Market: Tips, Types, and Formulas

Trading or investing in the share market can be a potentially lucrative way to create wealth. However, to maximise your returns and make informed decisions, it is crucial to understand all the costs associated with trading. One of the primary expenses that you will face is the brokerage fee. It can significantly impact your overall profits, especially if you trade frequently. 

In this article, we are going to explore the concept of brokerage, why the fee is levied, and the brokerage calculation formula that is commonly used. Additionally, we will also look into some tips that you can implement to reduce your brokerage costs and make more cost-effective decisions.

What is Brokerage and Why is it Levied?

Brokerage is the fee that stockbrokers charge for executing both buy and sell orders on behalf of traders and investors in the stock market. The fee compensates the broker for the numerous services they provide, which include providing a trading platform, market research, customer support, and facilitating the actual execution of trades.  

What are the Different Types of Brokerage Models?

Stockbroking firms offer two major types of brokerage fee structures to cater to different types of investors and trading styles. The most common types of brokerage models include: 

1. Percentage-Based Brokerage 

In a percentage-based model, stockbrokers calculate brokerage as a fixed percentage of the total transaction value. The total transaction value refers to the total amount of money involved in buying or selling shares. The percentage of brokerage often varies between stockbrokers and may also depend on the type of security being traded. 

One of the key features of percentage-based brokerage is that the fee increases proportionally with the size of the trade. Usually, full-service stockbrokers tend to adopt a percentage-based model. This is because the operational costs of full-service brokers are often very high, and the only way to recover their costs is to levy brokerage as a percentage of the total trade value.  

2. Flat-Fee Brokerage

In a flat-fee model, stockbrokers levy a fixed flat fee as brokerage per trade, irrespective of the total transaction value. This essentially means that the fee will be the same whether you are trading Rs. 50,000 or Rs. 5 lakh worth of shares. 

The flat fee per trade often varies between stockbrokers and may also depend on the type of security being traded. For instance, some brokers levy a flat fee of Rs. 10 per order for the equity delivery segment and Rs. 20 per order for the derivatives segment. 

Generally, discount stockbrokers offer the flat-fee model to their traders and investors. Since their operational costs tend to be far lower than those of full-service brokers, discount brokers can easily cover their costs with flat-fee brokerage systems.

What is the Formula Used to Calculate Brokerage on Trades?

The brokerage calculation formula depends on the specific fee structure of your broker. Here is the general formula for the two most common brokerage models in India: 

1. Percentage-Based Brokerage 

To calculate brokerage under this model, all you need to do is use the following mathematical formula: 

Brokerage = Total Trade Value x Percentage of Brokerage 

Here, the total trade value is calculated by multiplying the number of shares being purchased or sold by the price at which the shares are purchased or sold. It can be represented using the following formula: 

Total Trade Value = Number of Shares x Purchase or Sale Price 

An Example of Percentage-Based Brokerage

Now that you know the calculation formula, let us look at a hypothetical example to better understand the concept of percentage-based brokerage.  

Assume you wish to purchase 100 shares of ABC Limited. The current share price of the company is Rs. 3,000 per share. The total trade value, in this case, can be calculated using the above-mentioned formula: 

Total Trade Value = Rs. 3,00,000 (100 shares x Rs. 3,000 per share)

Say your stockbroker levies brokerage at a percentage of 0.20% of the total trade value. The fee that you would have to pay for this particular trade would be as follows: 

Brokerage = Rs. 600 (Rs. 3,00,000 x 0.20%) 

2. Flat-Fee Brokerage

To calculate brokerage under the flat-fee model, all you need to do is use the following mathematical formula: 

Brokerage = Number of Trades x Fixed Amount Per Trade

An Example of Flat-Fee Brokerage

Assume you are a trader who makes an average of 16 trades per day, which includes both buy and sell trades. Your stockbroker levies a flat fee of Rs. 20 per trade. The total trade value, in this case, can be calculated using the above-mentioned formula: 

Brokerage = Rs. 320 (16 trades x Rs. 20 per trade) 

Note: It is important to remember that the above-mentioned brokerage calculation formulas only help you calculate the basic brokerage charges. In addition to this, you are also liable to pay other charges such as exchange transaction charges, SEBI turnover charges, Securities Transaction Tax (STT), and Goods and Services Tax (GST), among others.      

Which Type of Brokerage Model Should You Choose? 

Selecting the right brokerage model is crucial for optimising your trading costs and aligning with your investment strategy. Here are key factors you must consider when deciding between percentage-based and flat-fee brokerage models: 

• Trade Frequency

If you are a trader who frequently places buy and sell orders in the stock market, consider choosing a flat-fee model. Opting for this model could be more cost-effective since it does not consider the total trade value. Also, it makes estimating brokerage costs a lot easier. 

On the other hand, if you trade infrequently, opting for a percentage-based brokerage model could be more suitable.   

• Average Trade Value

If your average trade value is large, a flat-fee model may be more beneficial since the trade value is not considered to calculate brokerage. Meanwhile, if your average trade value is low, opting for a percentage-based model could be more economical.  

• Investment Strategy

If you are a long-term investor who trades occasionally, a percentage-based fee may be more cost-effective in the long run. If you are a short-term trader, you might save a lot by opting for a flat-fee-based brokerage model.   

• Additional Services

As you have already seen, full-service stockbrokers are the ones who levy percentage-based brokerage fees. Therefore, if you plan to use any additional value-added services, such as research reports, personalised investment advice, and research calls, consider opting for a percentage-based model.

On the other hand, if you only require basic services from your stockbroker with no value-added services, you may opt for a flat-fee brokerage system.   

Tips to Reduce Brokerage Charges on Trades

Minimizing brokerage charges can significantly improve your overall returns. Here are some simple tips that can help you reduce your brokerage expenses:

• Compare Brokerage Charges 

Different stockbrokers levy brokerages at different rates. Whether you are opting for a flat-fee model or a percentage-based model, always make sure to compare the fee structures of different brokers. This way, you can easily find brokers offering competitive rates for your specific trading style.

• Minimize the Frequency of Trades

Since brokerage applies to each trade you make, reducing the frequency of trades could potentially lower your overall costs, especially if you opt for a flat-fee structure. Consider consolidating your trades to reduce the frequency.  

• Change Your Trading Strategy

Another way to reduce brokerage is to switch your trading strategy. Although this might seem drastic, it could help you save a lot of money and boost your returns. For example, if your strategy involves making multiple trades in a day, you could consider switching to a longer-term strategy, provided it is appropriate for your goals.

Also Read: How to Calculate the Dividend Yield?

Conclusion

With this, you must now be aware of the brokerage calculation formula and the strategies that you can use to minimize your trading costs. Now, it is important to remember that the cost-effective option may not always be the best choice. Instead, the ideal brokerage model should balance cost-effectiveness with your specific trading needs and investment goals.

Whether you plan to trade or invest in the stock market, having access to advanced research tools is crucial for making informed and effective decisions. The Research 360 platform, powered by Motilal Oswal, has all of the fundamental and technical research tools you need to enhance your trading performance. From stock screeners and sector-wise analysis to derivative insights and result analysis, Research 360 enables you to conduct a comprehensive analysis, identify potential investments, and optimise your portfolio.