I was reading a good post by Alok Mittal on Venturewood inviting people to suggest 1X100$ plan such as Online DVD rental etc which could work . My mind straight went to the ICICIdirect and Indiabull sites i had open. If some one could take out the juice of per transaction charge these brokers charge and charge just an yearly fees. how much more people will be willing to subscribe to the service and increase active trading.
This let me to do further research on the idea. Boom it took me to a story on techcrunch about Zecco a pure Finance 2.0 project which let collabrative stock market research with zero% commission on trading. How do they make it possible this what they had to say
The answer is pretty simple. Zecco makes money through 2 major revenue streams: online advertisements and interest from margin accounts.
Zecco has built up a community area on their site with forums covering all topics of trading, investing, finance, and business, and an area for bloggers and blog readers including commentary on trading, investing, and analysis.
Zecco also realizes interest from margin loans to stock traders is much more valuable income than trading commissions fees. While commissions fees are great income, they are substituting commissions fee income with advertising income. And they’re still holding on the very valuable interest fees attached to trading stocks on margin.
Now i do use indiabulls and icicidirect.com but i have never heard these terms ring a bell margin interest or margin account probably i m not a High Net Worth Investor with 50 L of capital market assets. but googling the term further brought out some facts. This link on rediff.com answers lot of questions which i had about trading.
In India margin account investment was only introduced by SEBI in Feb 2004. It specifics that if an individual has margin interest account. He can borrow the money from broker for trading above upto 3 times his actually paying capacity. So for instance if in your cash account you had 5,00,000 INR if that same amount was in margin interest account the broker can lend you more money to buy stock from market. This practise is very much useful if you believe a particular stock will be giving you a high yield return of lets say around 25%. This is a very common acceptable practise in west and forms the core of day trading.
I contacted local a share trader to understand how it works in india. This is what he had to explain
“In India margin interest is very high as compared to west. Companies want you to to put around 40% of money and they finance around 60%. Now this money is on 2% a month or comes out to 24% per annum basis. Secondly they only finance lets say 60% of amount but they charge interest on full 100%”
Probably need to do further research on number of users actully taking up this facility with brokerage houses. Then only potential of similar business model to work in india can be explained.
Please do post some comments if you can help people understand the active trading platform game from brokerage house to retail investor perspective.