How Do Discount Brokers Earn Money If Brokerage Is Zero?
Let me be honest. Discount Brokers do sound like a scam. I mean, they are allowing us to take actions at lesser costs (sometimes even for free). If they give us things for free, how will they earn? If you feel the same, you are not alone.
When I started trading, I genuinely wondered how discount brokers survive if they are not charging brokerage on equity delivery. Everyone online kept saying zero brokerage, and it sounded too good to be true. Years later, now that I am an industry expert, I can safely say that Discount Brokers are not running a charity. and are legit. They earn money in other ways, and some of these sources are surprisingly smart.
Here is the simple explanation I wish someone had given me earlier.
They Earn From Intraday and F&O Brokerage
Even if equity delivery is free, most brokers still charge brokerage on intraday and derivatives. This is usually a flat fee per trade. Since intraday and F&O volumes in India are huge, this becomes one of their biggest revenue streams.
In short, they charge where the action is. This includes actions involving intraday trades, FNO, Leverage Trading, and more.
They Earn Interest On Margin Funding
Oh! This is a big one – If you are using margin for stocks or pledging your holdings for extra leverage, the broker is earning interest on the amount they lend you. This is called margin funding. As a beginner, I never realised this was a profit centre for them, but it is significant.
They Make Money On Uninvested Funds
Whatever idle cash lies in your trading account is not always sitting still. Brokers can park this money in liquid instruments and earn a small return. Regulations decide how they use it, but they do earn a percentage on the float. This is why large brokers with lakhs of users make good revenue simply by managing idle funds.
They Charge Platform Fees Or Small Add-ons
Some discount brokers charge for API access, premium charting tools, small monthly platform fees, or value added services. These fees look tiny individually, but scaled across millions of users, they add up.
They Earn From Partner Products
Many brokers offer mutual funds, insurance, smallcase-like baskets, research tools, and third-party integrations. When you subscribe or invest through those platforms, the broker earns a commission or referral fee. This is known as distribution revenue.
They Save Costs With a Lean Online Model
Not a revenue source, but an important part of the equation. Discount brokers operate online, with low staff and very few physical offices. Because their cost structure is minimal, they can make solid profits even with low brokerage.
Expert Opinion: Why Zero Brokerage Makes Business Sense
A market analyst once explained it to me very simply. Zero brokerage is a customer acquisition strategy. In India, traders are extremely price sensitive. Once a user opens an account, the broker earns from every other service the trader uses, from intraday trades to margin interest. The lifetime value of a trader is high even if equity delivery is free. For the broker, the math works.
This helped me understand why the biggest brokers continue offering zero brokerage while still growing profitably.
So, Which Is The Best Discount Broker?
Well, now that I have convinced you of the benefits of discount brokers, which one should you choose?
If you ask me, I’ll pick Zerodha without a doubt. It is one of the oldest names in the business, is known for its stellar transparency, no hidden charges, no plans, just downright excellent service. In my experience, they’ve got the best software and tools are advanced use cases. Their dedicated API, desktop app, mobile app, and tools are perfect for my needs. Today’s your lucky day, as I am giving you a chance to Sign up for Zerodha for free!
FAQs
1. Do discount brokers lose money by offering zero brokerage?
No. Zero brokerage is only on equity delivery. Brokers earn from intraday, derivatives, margin funding, platform fees and distribution partnerships.
2. Is my idle money safe if the broker earns interest on it?
Yes. Brokers must follow SEBI regulations on client funds. Your money is not at risk because they earn interest on the float.
3. Why do some brokers still charge brokerage on delivery?
Because their business model is different. Some prefer traditional revenue streams rather than relying on margin and add-ons.
4. Should I choose a broker only because of zero brokerage?
No. Stability, order execution quality and customer support are more important than saving a few rupees per trade.
