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Indian Stocks And Shares: How Stockbrokers Cheat Buyers?
I read this in a magazine. A person new to share market went to a share broker to open an account. Broker told him to open the trading account with Rs. 50,000 and apply for demat, but it will take some time. So the new trader gave him the amount and signed all the documents broker gave him. He went and inquired about the status, but the broker told him it will take some time to open demat. After 2 months, broker told him that you have to pay Rs. 2500 extra. The real thing happened is broker took the amount from his account and invested in share and lost the capital. That person complained to SEBI (Securities and Exchange Board of India). When inquired, they came to know that the share buyer signed a document that the share broker has power to use the amount from his account without his knowledge.
So after reading the above story you may agree that there are many brokers in this world who are there to help you and many who are not. Keep that in your mind. If you give reasons for trading failures, then the number one reason is your broker, as market, volatility, etc. comes after that only. You lose your money because of your broker.
Share Margin Financing Contract: Trader’s Share = Broker’s Share
Now coming to the margin topic, the margin agreement says one thing clearly, “in case a share price goes below 40% of its original value, the broker has every right to sell your shares at whatever price prevails in the market and has got legal right to claim the remaining amount that has been given to you along with interest”.
So margin interest becomes just like a bank credit card interest. I will tell you how.
I am sure you know how the credit card companies charge interest. The broker will just do that. For example if you have bought 200 shares of RIIL with 1 lakh capital and signed margin contract and you are waiting for the price to go up by 10% or 20% as it is most volatile hoping to make 20 to 40k profit. Suppose the price would not do anything for 1 week, the broker will not say a thing. After one week the price drops by say 10% to Rs. 900 and value of your investment is 180k now. You have lost 20k. I you give check for 20k, then there is no problem at all, but if you will wait for the next day and the price goes another 12% down to Rs. 800 and your share value is 160k, then the broker will give you a call saying "I need a check for 40k sir, as you have to maintain 50% margin, i.e., 50-50 capital should be maintained” The broker has given you 1 lakh rupees and you should also have 1 lakh rupees according to the agreement or else the interest will be levied on the balance 40k as well making it a compound interest loan.
Naturally, you will not be having any money. If you had, then you would not take shares on margin at all right? So you will give a postdated check to the broker and request him not to sell off your position. Your broker is a very kind man and he agrees to that. You keep staring at CNBC and the RIIL price on the screen. After 15 days, you get frustrated as there is no money in your account and broker wants money. You will tell him to sell off your position or if you are more optimistic, then you will clear his debt and keep the remaining shares with you.
Now the broker's part is 1 lakh + 2000 rupees and he is supposed to charge you for 15 days only but if you don't notice, then they will charge you Rs. 2000 no doubt. The CMP of RIIL is Rs. 800 and the broker's due is 102k. So he sells off 127 shares and you are left with only 73 shares.
Now 73* 800 = 58,400 is what left in your account. Your account shows 100k -41.6k = 58.4k as balance.
Your broker's account shows 100k +2k = 102k as balance. Now by how much your scrip has to rise, just to get back your original capital invested worth 1 lakh. Can you guess?
It is 71 %. Yes, RIIL has to rise by 71% to get back your capital, i.e., you have to sell RIIL @ 1370 rupees. Magical things happen in our market only. How many days you have to wait to get back your capital and how many days your broker waited and who is hoping to become rich and who is becoming richer?
There are some firms that clearly state how much they will charge you for how many days, etc. etc. but in India, we are still dealing with rogue brokers who are not transparent in their dealings. Now this is how a margin trading happens in real world. I am giving you the worst case. The price may not fall by 20% in 2 days, but with a script like RIIL, educomp, it is possible.
Now how a broker finances 1 lakh for you that’s another scam. He will not put a single penny of his own money or incur a single penny as expense to serve you. He is aided by banks, NSE, investors, and of course punters, promoters, etc. It is a big network. They all help each other and they become rich. What we do is fighting with each other, paying tipsters, watching CNBC pundits, stare at graphs, pay internet bills, phone bills, etc. This is why 90% of the stock traders lose their money.