Stock broking is a regulated sector and in most cases there are numerous checks in place both from the exchange and the market regulators. However, there are some instances of brokers misappropriating funds of traders. For instance, Pulkit Mathur, 30, a New Delhi-based retail trader said that his broker used his funds in Futures & Options without his consent which resulted in loss of about Rs 17 lakhs.
However, according to market experts, most brokers to a large extent have clear demarcations between funds owned by the broker and client funds held. Keeping the case of Mathur in mind, we spoke to few brokers to know how a retail investor can be protected against financial frauds in the stock broking.
Nikhil Kamath, co-founder and director, Zerodha gives some points for retail investors to ensure the broker is following the required norms and regulations.
a) Quarterly Settlement: Ensure your broker is following the quarterly settlement rule where in all unused funds in your account need to be transferred back to your bank account at the end of every quarter. An added step of caution here would be to withdraw funds from your trading account once every month, which you could choose to transfer back the very next day hence not losing out on any trading opportunities.
b) Daily reporting: The broker is mandated to issue a report to the exchange at the end of every trading day. If the client in question has lesser margin than prescribed by the exchange there would be a penalty levied. One could check with his broker if this process is being followed systematically and no wrong reporting is taking place.
c) Broker Financials: Always pick brokers with robust financials and very little or no debt, this would ensure the broker you are with is in it for the long haul as they would have considerable assets and a potent revenue stream. There are websites that provide users with a common platform wherein the financial health of a collection of brokers can be ascertained.
d) Track record: Brokers with a track record of many years of ethical behavior and adhereing to a strict code of conduct should be given preference.
On the other hand, G Chokkalingam, founder of Equinomics Research & Advisory gave the below points which a retail investor zero in before trading in F&O segment.
a) First of all it would be better for the small retail investors to avoid F&O for speculative purposes as stocks in the short-term do not move solely on the basis of fundamentals. Use it only for hedging purposes and for pure speculative purposes. Still if someone opts for it, limit the exposure to the F&O trades in such a way that even if he loses 200 per cent of the margin money, his overall wealth erosion will not be significant at all.
b) Get the confirmation in writing from the broker that they will not execute any trades without getting the investor’s order on a recorded line unless the margin money is completely exhausted and develop a discipline of receiving trade confirmation regularly on a recorded line.
c) It is better to avoid using leveraged money for betting on F&O – any major loss from aggressive speculative exposure in F&O can wipe out all investments and make investors indebted for a very long period.