If you have a large trading account and fear that your broker will run away with your money or do trading on your account without your knowledge then you need not fear. The rules by SEBI (Securities and Exchange Board of India) are so strict that the brokers actually fear trading without your permission in your account. The rules governing management of money in brokers account are even stricter.
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According to a recent rule any money that is not used in a Demat account needs to be returned to the client. Earlier if you remember the brokers used to keep the money in your trading account. You could have used that money any time you want or leave it idle. But now rules have changed. The money that is not blocked or used for a certain time needs to be returned to the client’s bank account. This is to ensure in case you had left a lot of money with your broker and God-forbid some thing happens to you, all the money that is unused will be refunded.
In many cases family members do not know how much money the bread-winner has kept in the trading account. In earlier cases the whole money was kept with the broker and returned only when the nominee closed the account. The brokers used to keep the interest received on that money and return only the principal. Today they cannot.
In the US the money is not returned but the client gets interest on the money equivalent to a debt mutual fund of US (anywhere from 1-3% in a year). I do not understand why SEBI does not enforce this rule here instead of returning the money. Here in India debt mutual funds make almost 9% in a year. If enforced the money lying idle in Demat account will make more than money in our savings account.
SEBI knows how many clients a broker has, their PAN and other details like which bank account your account is linked to etc. They can find out all transactions done on you account through the broker, like cash deposits and withdrawals. So there is almost NIL chance that any broker can run away with your money.
According to the terms and conditions of SEBI no broker can buy or sell against your wish in any stock or derivative. They may call you, they can ask you to buy a stock because they feel its headed up, but I don’t think if you deny they can go against your wish and buy that stock. It is a totally different story that you allow your broker to trade on your behalf, in that case if there is a loss they will remind you that they had taken your permission.
However I am talking about the popular and big brokers. I have no experience and idea of small brokers who run business from their homes with a couple of computers. These brokers are popular in remote areas, suburbs, village and small towns. My father-in-law had account with one such broker running business from home with one computer, but I never heard of him saying they ever traded against their wish.
If there was a miss-communication, misunderstanding on phone, or a trade done by mistake then that’s a different issue altogether. But as far as I know brokers rarely trade against the wish of their clients. Its a serious issue. SEBI takes it very seriously. If SEBI comes to know of it through complains, their license will be canceled – so they actually fear trading without your permission.
There is a plain logic to it as well. See brokers need a lot of trading to make reasonable money. So if they need to cheat they will trade one everybody’s account. Trading in one or two account against the wish of the client is not going to make them any money. And if they trade against the wish of all of their clients someone might definitely report to SEBI or consumer courts. A few complaints – investigation – and gone – the broker is out of business. So they will fear doing any trade without the knowledge of their client.
In this case I am sure some kind of miss-communication took place. Or probably the trader was not clearly told the risks involved in Futures trading. He might have only told that if you buy a Future you make a lot of money if Nifty goes up. Probably he was never told that if it falls, he will have to pay for the losses.
Remember brokers will never deny a trade. If you ask them, “shall I buy SBI now?” They will never say No. They will always say, “yes buy its a great stock, it will go up very fast.” In 95% of the cases the client gives their consent and the trade is done.
When any broker applies for brokering license they have to a sign terms and conditions under which they keep a lot of money as security with SEBI – on top of that every trade is monitored by NSE, BSE, MCX or any other exchange where the trade takes place. Its near impossible for any broker to fudge accounts or run away with their clients money.
A broking company may declare bankruptcy, refund their customers and close business but the conditions are so difficult that they cannot run away with their clients money. For example no broker accepts cash – you have to do an online transfer or pay by check. Similarly they do not pay you by cash. So 100% transactions are accounted for and all records can be produced when demanded.
Sometimes some broker may close business but they may either close your account or shift your shares to some other broker and you become their clients. Of course the F&O trades needs to be closed. I think they cannot be shifted.
Still you should do your research before opening an account with a stock broker. For example you can find complaints against any broker in the Arbitration Status page of the NSE. You can also read reviews online about the broker. Read what their clients are saying. At least you get some idea.
Your bank also is a stock broker but its their by-product so I would advise to open an account with a company that specializes in stock brokering. That should be their main business. If that’s not their main business they will not be able to give kind of support you may need.
Discount Broker Benefits:
At least your F&O account should be with a discount broker. This is because if you are paying Rs. 50/- per lot then you are paying too much to your broker. The discount brokers charge per trade (not per lot). Most discount brokers in India charge are Rs. 20/- or less per trade.
Why Two Trading Accounts?
You must have 2 trading accounts. One should always be used for long term stock investments. For example make a list of companies that you think will be multi-baggers in a few years and start a SIP (systematic investment plan) in them. Let say you invest 3000 every month in rotation on the 1st of every month in 5-10 companies of your choice. Lets say at an average return compounded annually these companies return 15% CAGR (some stocks return more), then in 31 years you will have more than 2 crores in your kitty. More than enough for your retirement from one account itself for a small investment of just Rs. 3000/- per month. Remember you can make much more if one of the stocks behaves like ITC or a Wipro.
The other account should be for F&O trading purposes only. Now here is some magic. Lets say you start with 2 lakh only and do not add a single paisa to that account ever. Now lets assume you make just 24% CAGR (Compound Annual Growth Rate – only 2% a month) which is entirely possible if you trade conservatively. In 20 years you will have almost 2 crores. Not to forget you have another trading account that’s also helping you grow your money.
If you are wiling to learn, have patience and discipline its entirety possible.
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