Zerodha: A Success Story of Discount Broking

22 Nov 2019  Read 6210 Views

Do you wonder that even after being a discount broker how does Zerodha make money? In just 9 years how did Zerodha become the largest stockbroker?

The answer to this is the introduction of discount broking by Nithin Kamath who is the co-founder of Zerodha. Nithin Kamath started trading when he was around 18 years old. Later, he joined a call center so that he can work at night and trade during the daytime. He quitted his job afterward and worked to build a completely online brokerage business. He along with 6 others started the business and now Zerodha has over 1000 employees.

What is Zerodha?

Zerodha is a financial service company that is a member of NSE, BSE, MCX, MCX-SX providing brokerage facilities, a trading platform, commodities trading at low rates.

How does Zerodha function? What is unique about Zerodha?

Zerodha works on the concept of discount broking i.e., it charges reduced commission or low brokerage on transactions that attract the investors especially the beginners to use this platform. Undoubtedly this is the main reason because of which it has a client base of more than 1 million, making it the largest stockbroker in terms of clients.

We can also say that the company got the first-mover advantage as Zerodha was the first discount broker in India. As per the founder and CEO of Zerodha Mr. Nithin Kamath, Zerodha was incorporated to make trading, barrier-free, so is its name Zerodha i.e., No Obstructions. Another important reason for the rapid growth of Zerodha is that the company keeps coming up with innovative ideas and unique strategies that help the company in getting an edge over its rivals.

What is the business model of Zerodha?

Zerodha works on 'Low margin and high-volume model.' As already mentioned, Zerodha charges a minimal amount for transactions because of which the trading volume is high. The collection of small amounts from a large number of clients leads to good revenue. Also, the operational costs of Zerodha are quite low as compared to some of the top brokers. Its online structure enables it to maintain low operational costs.

Competition and Challenges faced by Zerodha

Along with the competition from other discount brokers like Upstox, Zerodha faces serious competition from full-service brokers such as HDFC Securities, Kotak Securities, Motilal Oswal, etc.

Full-service brokers are traditional brokers who provide research and advisory facilities to their clients. Apart from providing advisory facilities and all, full-service brokers have an advantage of their branding and credibility. We should also acknowledge the fact that the physical presence of full-service brokers enables a smooth customer experience.

Certain challenges faced by Zerodha are:

  • Technical glitches are often observed in Zerodha because of heavy trading which has led to a decrease in customer satisfaction.
  • Customer support of Zerodha is not very efficient as compared to other top brokers.
  • Daily reports, Quarterly result analysis, news alerts, etc. are not provided by Zerodha unlike some of the other top brokers.

Even after having some cons, Zerodha continues to expand its client base at an incredible rate. The CEO of the company says that he aims to take the client base to 5-10 million in the forthcoming years. He also said that Zerodha doesn't distinguish HNI's from others and also that they have never sold any product promising returns.(HNI's are High Net worth Individuals whose investing bank balance is at least Rs. 2cr.) It is also notable that the company hardly spends any amount on advertising but still enjoys a great market reputation as evident from its impeccable growth.

- Sanyam Baid

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