A stockbroker handles buying and selling of shares on behalf of investors. It is mandatory to have a stockbroker, if you want to trade in shares of a company on a stock exchange like BSE or NSE. In India, there are many stockbrokers who offer brokerage services. You have to be very careful while choosing the stock broker as there are many ways in which you can be cheated. In this blog, we will discuss the ways through which a stockbroker can cheat you.
Before recommending an investment in stocks, your stockbroker must know how much risk you are willing to bear (risk tolerance), income, investment experience, financial needs, and investment goals. He cannot just recommend any stock. There are stockbrokers who force investors to invest in particular stocks to serve their own interests. This is nothing but cheating by the stockbroker.
Not all investors are ready to bear a high risk. There are some investors who want to invest in the stock market, but don't like taking high risks. Make sure the stockbroker understands your needs before recommending an investment in stocks.
The stock broker can cheat by providing misleading information or by omitting facts which can impact an investment decision. This includes not providing the complete information on risks, liquidity, or any other material facts.
A stock broker can cheat investors through unauthorized trading. The stock broker can make unauthorized trades from your trading account. The broker can transact on your behalf, if you give him the authority to do so. He can transact on your behalf only if you give him the power of attorney (POA). Power of attorney is usually given while opening a trading account with a broker. So make sure to read the application form and the voluminous agreement booklet properly, before signing it. In case you sign on the dotted line on the POA page, you give your rights to the stockbroker. He can buy, sell and pledge shares on your behalf.
As the number of complaints against unauthorized trading increase, SEBI has taken steps to tackle the issue. According to SEBI Rules, brokers can trade on behalf of clients only after keeping evidence of the client having placed such an order, which should be in the form of:
a. A physical record which is written and signed by the client
b. Telephone recording
c. Email from authorized email id
d. Record of messages through mobile phones
e. Any other legally verifiable record.
In case any dispute arises, a broker must provide the mentioned records.
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SEBI has done away with the practice of sub-brokers. Earlier, sub-brokers required a registration with a regulator. SEBI has said that no person will be granted a fresh sub-broker license. The registered ones will have time till the end of the current fiscal to migrate or act as a trading member. A sub-broker acts on behalf of a trading member and helps existing investors trade in securities.