Is it possible for a broker to close shop with clients’ money and shares? I have this question because rates of brokerage are very wide ranging from unlimited trading for 666/- per month to several hundred rupees per lot. What is the reason for someone to open accounts with expensive brokers like icicidirect and hdfcsecurities. Indeed the features on zerodha are far better than icicidirect. And there are brokers who are even cheaper than zerodha. How are all the players sustaining?
1 Like
The brokerage industry is highly regulated. One of the parameters where regulation comes into the picture is capital adequacy. Brokers are audited frequently and industry practices are such that events where a broker absconds with a client’s money or share holdings is unlikely. There could be events where brokers or their clients have lost more money than they have and then the broker would go bankrupt. But this can happen only if the broker is not collecting adequate margin from his clients. Generally, all online brokers collect adequate margins as mandated by the Exchanges and SEBI.
Coming to the second part of your question. How do brokers make money when they’re all charging a flat rate per trade/period? The answer would be that costs go up for brokers at a lower rate for each client they onboard. The costs of technology and servicing clients has to be paid for and there would be some number of clients for each broker that would translate into that breakeven point. Onboarding more clients would be reward for the broker for putting their system in place.
Hope this helps.
5 Likes
Thanks for the response though it looks like it is theoretically possible for the broker to abscond with our money and stocks. The second part I am unable to understand is how will very very very high cost brokers like icicidirect survive in this competitive market.
1 Like
Its also theoretically possible for a bank to go bankrupt/abscond with one’s money. But, highly unlikely.
ICICI Direct does not flat brokerage. They charge in percentage terms… You could take a look at their charges on their website.
2 Likes
It could be theoritically possible, but it isn’t common. This is because most brokers, if not all, are strictly regulated. Its advisable that before any trader sign up with a broker, you should consider the regulation status of that broker. Auditing done for regulated brokers ensures stability and financial security for traders
1 Like
That’s correct question to ask, because there are so many scums no matter what regulations is that you can’t even imagine. Just take a look on the internet. Google for “forex scum” “binary options scum” “crypto scum” and all things like that and see for yourself.
I’m pretty sure it’s scam and not scum…lol
Although there is regulation on brokerage, some brokers are not regulated. They might charge you less and offer you some very tempting services, but one needs to be very careful, as many of such brokers are scams. So, sometimes it is better just to pay high fees, then to be scammed