The Zerodha story: Access to financial markets made easier and cheaper

Image Source: Zerodha

Despite the pandemic, Nifty and Sensex have been roaring high lately, staying close to their all-time high mark. In recent times, India has seen many people move from traditional investments in gold and real estate to equity and mutual funds. This rising investment interest can be attributed to a lot of reasons, two major ones being tech innovation and reduced charges.

The major disruption in the Indian investing world was brought by an 11-year-old online brokerage firm, Zerodha.

INR 100 crore salary?

The three Zerodha promoters were recently in the news for having a salary of INR 100 crore each. To clarify, the INR 100 crore amount is an enabling provision for ensuring liquidity and not the actual drawn amount. However, this does bring forward the inspiring story of these founders and how an innovative and disruptive solution to the high brokerage charges made Zerodha the most prominent stockbroker in the country in terms of active retail clients.

Highest market share in trading volumes handled

Nithin Kamath had been trading for ten years before being burned out and frustrated with the industry’s high charges and technical challenges.

Zerodha was founded in 2010 by brothers Nikhil and Nithin Kamath with a goal to break all barriers that traders and investors face in India in terms of cost, support and technology. 11 years later, Zerodha has over 50 lakh clients, handles more than 15% of all Indian retail trading volumes and has the highest number of investors on its trading platform.

India’s first discount broker

Zerodha is India’s first discount broker and the first to offer no brokerage charges on delivery trades and a flat charge of INR 20 per executed trade at an intraday level. For reference, most firms used to charge brokerages as a % of the traded value, i.e., the higher the traded amount, the higher the brokerage for the company.

Zerodha’s model was new for India, but it isn’t unique. In fact, it took inspiration from Robinhood’s strategy in the US.

No external investment

Despite its low charges, Zerodha made a profit of INR 442.4 crore during 2019–20 and posted revenue of INR 1034.8 crore.

While most businesses suffered during the pandemic, Zerodha saw an almost 2x increase in registered users in 2020. Unlike most startups, Zerodha hasn’t taken any external investment.

Zerodha helped investors gain access to financial markets at low costs. It also helped the founders reach billionaire status. The combined net worth of Nithin and Nikhil Kamath stood at USD 1.55 billion as of September 2020, ranking 90 in the Forbes’ “The 100 Richest Indians” list.

Growth in market share to continue?

Today, Zerodha has platforms for investing in stocks and mutual funds, bonds, options, and even an API platform to let investors build their own app. In 2019, they expanded their services to HNIs by launching an asset management firm, True Beacon, with an aim to address the inefficiencies of the traditional asset management model.

In the past ten years, Zerodha has successfully managed to gain the market share of active traders, but will increasing competition from other discount brokers impact Zerodha’s market share growth?

Note: For the sake of simplicity, the above graph refers to the % of total active client base on NSE using Zerodha

Zerodha’s ant problem

In September 2020, Paytm Money, part of the Paytm digital startup and backed by Jack Ma’s Ant Group, announced that it had received regulatory approval for an online brokerage. This deep-pocketed tech-savvy startup, Paytm, has already changed the way lakhs of Indians transfer money and is perhaps the biggest competition to Zerodha right now.

Currently, Zerodha has Demat AMC charges of INR 300, whereas Paytm Money has 0 AMC charges. Both Zerodha and Paytm Money levy INR 200 as trading account opening charges.

Small retail investors benefitted

New players like Upstox, Groww, Paytm Money are adding to the competition and are using technology to up their games. This is helping India’s common man by giving them platforms and tools to access the financial markets, which up until a few years ago were only easily accessible to the rich, institutional brokerage firms and high net worth individuals.

India may have a population of 1.3 billion people, but only a tiny fraction invests directly in equities. The fight to gain dominance over the new investors will be fierce. Zerodha has started an encouraging trend that is here to stay!

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