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Brokers are meant to only facilitate buying and selling of securities. They are also permitted to offer advice on which stocks the client should buy or sell.
But do not leave your funds and securities with a broker, warns Sanjay Kumar Singh.
A Delhi-based broker, Allied Financial Services, is in the news for the wrong reasons.
Its activities have allegedly triggered a default by its clearing member, IL&FS Securities Services.
Odisha Cement, a client, has alleged that mutual fund (MF) units worth Rs 344 crore were transferred by the broker from the demat account of one of its subsidiaries.
While the courts and the regulator probe deeper into the case, let us focus on some of the mistakes investors must avoid in their relationship with their broker.
The first lesson, according to experts, is that clients should confine their relationship with their broker only to broking.
Brokers are meant to only facilitate buying and selling of securities.
They are also permitted to offer advice on which stocks the client should buy or sell.
"Regulations do not permit brokers to manage customers' money," says Nithin Kamath, founder and chief executive officer, Zerodha.
Allowing your broker to buy and sell on your behalf can spell trouble.
All is well in such a relationship so long as the broker makes profits and gives the client the promised return.
But once he makes losses, he may not only fail to pay the promised returns but even the principal.
"If you get a call from a broker saying 'give us the shares lying in your demat account and we will earn returns for you on it', that should set the alarm bells ringing.
"Stay away from such brokers," says Kamath.
He adds that clients who want an entity to manage their money should invest with a licensed portfolio management service or MF house.
Sometimes brokers also ask for the shares or MF units lying in a client's account and promise to pay a regular interest on it.
"The broker uses those shares for his own business activities. The risk in such arrangements arises if the broker becomes insolvent," says Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm.
Clients often fall for these schemes because of the desire to make some extra money on an 'idle' asset.
But such arrangements can be perilous.
"If a person is trading himself, he will probably understand the risks of what he is doing. But when he lends his securities to a broker, he does not know how much risk the latter will take with them," says Vikas Singhania, executive director, Trade Smart Online.
Investors need to be on guard regarding any activity in their demat account.
If you sell shares today, your depository will send a text message and an email two days later informing you that the shares have been debited from your demat account.
"If you get such a message even though you have not sold shares, complain immediately to the exchanges and to the Securities and Exchange Board of India," says Kamath.
If you are not savvy enough, do not trade in the futures and options segments and do not let any other entity do so on your behalf, as leveraged bets in these segments can result in massive losses.
Retail investors, who want to lend their shares, should use exchange-based platforms like the security lending and borrowing mechanism.
Borrowers and lenders both place bids and transactions happen if there is a price match.
The exchange charges a small margin.
"Retail investors can avail of this facility if their broker offers it. Using this channel will ensure the safety of your shares," says Singhania.
Finally, do not leave your funds and securities with a broker.
"Only have money in your broking account when you are trading, otherwise take it back," says Jain.
