Reblog: How safe is my broker?

Investors are often cautioned about investment risk, market risk, etc. by their advisors and brokers. Investing in a particular asset or any equity share in particular, can give back good returns or, on the contrary, even wipe out the basic value of money that you have put in. But did anyone tell you that the broker himself can also cheat you? He can go bankrupt or be a fraud?
Not only have the small ones, but big investment firms have also given their clients a nightmare. If viewed from the brokerage company’s perspective, it is doing a business purely. Profits are their primary motto. And your money, except from the brokerage charges, is a secondary element for them.
So, how can a stock broker deceive you?

  • He can mislead you to make certain investment decisions, by hiding or misrepresenting material facts from you.
  • Recommend investment ideas, not suitable for you. E.g. making a retired, elderly investor to buy risky stocks.
  • The broker may ponder on a particular stock or stocks, making all his clients buy it, to inflate the price and not diversify your portfolio properly. (Of course, the final order comes from you. But you may be trapped by his words)
  • A broker can execute trades from your account without your consent.
  • Brokers frequently buy and sell, i.e. churn client’s portfolio. This gives them more brokerage.
  • Offer high leveraged trading to attract clients.

There are many more kinds of scams that have taken place and can happen in the future. Be it big or small, what will you do if your money is under danger? As mentioned earlier, your money can be mopped off or stuck even in the big and famous brokerage houses. You speak to the traders/ advisors at the call centers. There are senior people behind them making recommendations and also trading in the company’s account. There are chances of bankruptcy. Because their transactions are in much higher amounts.

SEBI is in the headlines almost every day, coming up with new norms. Surprisingly, many investors fear or hate SEBI. But instead SEBI is “har investor ki taaqat”. Its preamble says it is “to protect the interest of the investors…”. It was formed to guard the investors and to develop and regulate the securities market.
Protection is better than cure. Before you reach the haphazard stage, you can protect your money by staying alert and acting smart.
  • Check the license and certificates. The stock broker must be a member of the stock exchanges and be registered with SEBI. It is mandatory for them to publicize important information about them. If you go to the broker’s office, you will find certificates hanging on the walls, just like the doctors have. These are available on the broker’s website too. On the SEBI registration certificate, there is a broker’s registration number. It begins with “INB” or “INS” for sub-brokers. Look for the number and cross-check it at SEBI’s website. Here you will get all the information about the broker.
  • While opening an account a booklet of forms and agreements is handed over to you for signatures. Take time and have a look at it. One of the agreement in there is a Power of Attorney (PoA), saying that you give the broker authority to trade on your behalf. Read what it says. You need not allow the broker to transfer funds from or to your bank account.

The broker has the authority, but cannot trade without your consent. He can only sell shares if the investor has some long pending dues and recover money from share sale.

  • Avoid frequent churning. The more you trade, the more brokerage will be charged. Don’t fall prey to those calls, SMSs, newsletter recommending you to take certain positions. Also, the broker’s recommendation should not be accepted recklessly.
  • Investors get fascinated by the F&O segment quickly. By definition they may sound, profitable, but are hazardous. Derivative are hedging instruments. Retail investors doing derivative is like a child given a sharp edged sword.
  • Brokerage reports are not prepared keeping in mind your returns and benefits. But not all are false. You should not completely rely on them.

Now, this was the protection part. Let’s talk about cure. If the shield is still cracked, blow the whistle to SEBI. You can file a claim against your stock broker, if you are a sufferer of any investment fraud. The kind of grievance differs. So, you have to let the broker know your complain first. Suppose you want to charge a sub-broker or any employee or want to warn the broker himself. So, first write an email and call the brokerage company.

Complaining against your broker
If not satisfied, approach the stock exchange for complaint against the stock broker (or depository participant, any listed company). BSE and NSE have formed IGRC (Investor Grievance Redressal Committee) and RICRC (Regional Investor Complaints Resolution Committees), committees that act like middleman to solve the issues.
SEBI comes above all. Unsatisfied disputes from the stock exchange are then filed with SEBI. SEBI handles issues related to brokers, listed companies, portfolio managers, mutual funds, DPs, etc.
SEBI is the regulator. It has a separate team who scrutinizes the market irregularities. Any trading manipulation found, is reported. So the big traders cannot just play with the share price for their benefit. You can complain against any intermediary at
Yet, many investors fall prey to brokers or volume and price manipulation. The financial loss is obvious to happen.
Investor’s fund
The stock exchanges, BSE and NSE, collect some money from its members i.e. the brokers. It is Rs. 0.15 per Rs. 1 lakh gross turnover of the broker. On a quarterly basis, the exchange adds 2.5% of the listing fees collected by the exchange. All this money is pooled up and an Investor Protection Fund is created. There are trustees to look after the fund.
When an investor is entitled to receive a claim, it is paid from this fund. There are certain norms for how much and when will the money be paid, but the investor does not bear a complete loss of his assets. For example, the maximum claim limit per investor per defaulter is Rs. 15 lakhs.
Are Discount brokers more riskier to trade with
The simple answer to this question is NO. All the brokers have to comply with the same directive of SEBI and have to follow same compliance with it. There are some very small city specific broker with have issues and have even closed their broking business. Before choosing the broker, look at number of complaints with SEBI against the broker. If they are less than .5% of the total clients, say for example if the broker has 100,000 clients and the complaints are less than 500 you can be pretty sure that the broker is in good standing. Please understand 1 complaint is also not good but as the number of clients increase, every client has different expectation of the quality of service expected. So it is possible that frivolous complaint was raised by the client. You can find the latest report about the number of complaints against your broker here.
Apart from this also keep an eye on the profitability of your broker. A b roker who is generating profit would generally not close easily. While if the same broker is running in loss for some time, the risk increase and you can even think of changing the broker in that case.
Finally the size of the broker is also a important criteria to look at. Most of the time local small broker goes bankrupt. Hardly ever national broker have gone out of business. So if you are trading with a broker who has account in thousands, you can be assured that the broker cannot close the business in a hurry.
Hope this article has helped you in understanding about the safety aspect of the brokers.

The original post appeared on and is available here.

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