Nithin Kamath says these hidden expenses in buying and selling can wipe out low brokerage benefit

Zerodha co-founder Nithin Kamath has cautioned traders to pay nearer consideration to Depository Participant (DP) expenses, saying these often-overlooked charges can considerably enhance the price of buying and selling, particularly when brokers levy them as a share of transaction worth.

In a submit explaining how DP expenses work, Kamath mentioned that each time an investor sells shares, the securities are debited from the demat account and delivered to the clearing company for settlement. This debit attracts a DP cost, because the dealer’s depository participant facilitates the method and bears settlement threat.

At Zerodha, the DP cost is Rs 13.5 plus GST per transaction, which features a Rs 3.5 depository charge. Nonetheless, Kamath identified that not all brokers comply with a flat-fee construction.

Some corporations, he mentioned, cost DP charges as a share of the promote worth. At a fee of 0.04%, an investor promoting shares price Rs 10 lakh would pay Rs 400 as DP expenses on a single transaction. In such instances, he argued, the headline promise of low brokerage could also be offset by increased back-end prices.

Kamath additionally highlighted one other observe that may enhance prices for lively merchants. Sure brokers cost DP charges on each promote transaction, even when the identical inventory is offered a number of instances in a day. For example, if an investor sells shares of Reliance 4 instances in a single buying and selling session, the DP cost could also be levied 4 instances. At Zerodha, he mentioned, the cost is utilized as soon as per inventory per day, no matter the variety of promote transactions executed in that inventory.

In contrast to brokerage, which is prominently displayed throughout order placement, DP expenses are sometimes much less seen within the buying and selling interface. In consequence, many traders fail to issue them into their total buying and selling prices. Kamath mentioned these small expenses can accumulate over time and materially have an effect on returns, significantly for frequent merchants.

Explaining the rationale behind DP expenses, Kamath mentioned that every promote transaction requires operational dealing with by the depository participant. This consists of debiting shares from the demat account and guaranteeing supply to the clearing company for settlement. The depository levies a charge for this course of, and brokers usually add a facilitation cost on prime to cowl operational effort and related threat.