How not to get CHEATED by your stock broker

What's the most common story you have heard from relatively unaware innocent stock market investors? I hope it's none other than they being tricked by their broker advise and investment decisions, and sitting at loss which is nearly impossible to cover.

Is it so difficult to avoid falling prey to this trap?

The basic reason for this sad ending in most of the cases is lack of knowledge, a little bit of carelessness from investor's side and over trust shown on the broker. As an investor you will have to come out of your comfort zone and put some effort from your side so that nobody gets to play with your money mindlessly.

In this article we will discuss some basic tips to follow while dealing with brokers so that the financial crisis is avoided in future.

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The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor's degree from IT-BHU. He can be reached at bimleshs@gmail.com.

1. Search: Utilise the power of internet

Before choosing and getting into a relationship with your broker try to search about its historical performance, its popularity with existing customers, legal disputes if there are any, its membership details and quality of management.

These details are very easy to find out once you search them on internet. A great understanding comes from reading the review comments of existing customers.

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2. Be careful: Filling the documents

Once you have chosen a renowned and reliable name it's time to fill up the contractual documents. Just don't behave like you are buying a mobile SIM card where you give your photo and ID proof and leave the rest to the vendor. He is free to fill all your details in the form without your knowledge.

This is one of the biggest mistakes which create the financial mess for the investor.

Read the contractual document carefully and fill the details as per you want it. Don't leave any blanks (strike them off if you don't wish to fill anything) as in case of dispute one might fill data in it without your knowledge and produce it as proof in future.

This rule applies for each and every document be it KYC, brokerage plan, trading options (stocks, currency, MF, derivatives etc). Never ever submit an incomplete form.

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3. Read the numbers: Audit your account at regular intervals

Your broker is not GOD and you are not a devotee who has donated all your money to serve him. It's a business relationship and it should be treated as one to avoid losses.

You should be watchful about the flow of funds from your account. Keep an eye on unusual transactions or transaction fees.

Get full knowledge of the types of fee he charges for various kinds of services.

The best frequency to do so is daily as it will alert you instantly and major losses can be avoided. Don't keep more money than is required for a particular transaction in your account.

Unused sum is one of the major sources of unwanted transactions.

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4. Be possessive: Don't share your login/password details

This is the situation where being unrealistically possessive is not a taboo. There is nothing new in this suggestion. You have heard it n number of times and any discussion regarding investor's safety cannot be complete without this statement. It's just a strict reminder: Please don't share it with even the most trusted ones if you don't think you are going to die the next day. Uncalled for trades might take place and you will be left poker faced and sobbing if you don't stick to this rule.

Changing passwords every week is also recommended as it provides additional shield.

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5. Don't lose your power: Be careful with the POA (Power of Attorney) you sign

Power of attorney is the legal document which authorises your broker to operate your demat account as per the documented rules. POA is the document which gives immense power to the holder if not drafted properly. Please read the draft carefully and take care of the following points before signing it:

1. It should not be for infinite period. Termination date should be documented clearly.

2. It should not give unlimited power to the holder. Try to restrict the rights till transactions only and not give the rights for closure and opening of accounts. Broker should only be allowed to take positions with available amount in the account and not use leveraging without taking your consent.

3. It should contain the cancellation clause at any time with prior notice.
 
Conclusion

The list above does not contain all the safety measures but the most basic and effective ones. These are good tips to start with and with time and experience one can definitely master this art. Remember the foundation needs to be tough to build a strong house.