Learn/ Risk/ Lesson 05

Risk · Lesson 05 8 min read Intermediate

What costs really take

Brokerage is the cost everyone checks and the smallest one there is. Added honestly, the full stack of charges turns a marginally profitable method into a losing one — and it does so without ever appearing in the P&L column people watch.

The whole stack

On a single round trip in Indian markets you pay, in rough order of size:

  • Slippage — the gap between the price you saw and the price you got. Usually the largest item, and the only one that appears on no statement.
  • The bid-ask spread — paid on entry and again on exit, by everyone, always.
  • STT — securities transaction tax, charged differently on futures, on options sold, and on options allowed to expire in the money.
  • Brokerage — the one everybody compares. Often a flat ₹20 per order, and frequently the smallest number in this list.
  • Exchange transaction charges, SEBI turnover fees, stamp duty, and GST on brokerage and transaction charges.

Taken individually each looks trivial. Taken together on a round trip, and multiplied by how often you trade, they are frequently the difference between a method that works and one that does not.

Why frequency multiplies everything

Costs are charged per transaction, so they scale with activity rather than with capital or with skill.

Annual cost drag against trading frequencyIllustrative
A straight line, and that is the point. Twenty round trips a month at a realistic all-in cost consumes roughly 14% of capital per year before a single trade has been judged right or wrong. Your method has to clear that hurdle before it earns anything.
Gross against net, same hundred tradesIllustrative
A method earning 20% gross returns almost nothing net. Nothing is wrong with the trading. The entire difference is friction, and it is invisible if you only look at the gross line — which is what most journals and most screenshots show.

Costs do not care whether you were right. They are charged on the attempt.

Slippage, the invisible one

Slippage deserves its own section because it is both the biggest cost and the only one nobody tracks.

You see a price, you press the button, you get a different price. Across a year the difference is enormous, and it is systematically worse than you remember, because it is worst exactly when you most want to transact — at the open, on news, and when a level breaks and everybody acts at once.

Three things make it worse, and all three are within your control:

  • Trading illiquid contracts. Far out-of-the-money strikes and far-dated expiries have wide spreads and thin books.
  • Using market orders in fast conditions. A market order in a thin book is an instruction to accept any price.
  • Trading immediately at the open. Spreads are widest in the first minutes and narrow substantially afterwards.

Checking your own number

Do not estimate this. The figure is available and it is worth an hour.

  1. Download the contract note or tax P&L from your broker for the last month.
  2. Sum every charge — brokerage, STT, exchange, SEBI, stamp duty, GST.
  3. Divide by the number of round trips. That is your true per-trade cost.
  4. Divide the total by your capital. That is your monthly drag, and twelve times it is the hurdle your method has to clear annually.

Almost everybody who does this for the first time finds a number two to four times larger than they assumed. The exercise is unpleasant and it changes behaviour more reliably than any amount of advice.

Common mistake

Choosing a broker on brokerage alone. The ₹20 flat fee is real and it is also the smallest item in the stack. Execution quality, order types and platform stability affect slippage, which is several times larger. Saving ₹5 per order while losing ₹200 to a worse fill is a bad trade made once and then repeated every day.

Read it yourself

Practice

An intraday session with a total range of 0.9.

  1. All-in cost is ₹250 per round trip and your average win is ₹1,200. What fraction of every winner goes to costs?
  2. You trade 15 round trips a month on ₹3,00,000 of capital, at ₹250 each. What is the annual drag?
  3. Looking at the chart, what does a 0.9 total range imply about scalping this instrument?
Show answers

1. About 21%. One trade in five is working purely to pay the tolls.

2. 15 × 250 × 12 = ₹45,000, which is 15% of capital per year. Your method must return more than 15% before you have earned one rupee.

3. That it is close to impossible. If the instrument moves 0.9 across an entire session, and the spread plus costs consume a meaningful part of any single move, there is very little left to capture. The chart is not telling you the trades are hard to find — it is telling you that even the winning ones may not clear the friction. Choosing what to trade is a cost decision before it is an analysis decision.

Terms used

Round trip
One entry and one exit. The unit costs are charged on.
Slippage
Difference between the expected and the executed price.
Spread
Gap between bid and ask. Paid twice per round trip.
STT
Securities Transaction Tax. Rates differ by instrument and by how a position is closed.
Cost drag
Total charges as a percentage of capital over a period.

Practise this on your own charts

The Risk track works through 5 lessons like this one, each built around a drawn example and an exercise you complete yourself.

See the Risk track