Is Demat A/c with Discount broker risky? A take by Capitalmarket..

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Always open a demat and trading account with reputed companies with high net worth. There have been enough instances of brokers going bankrupt. The event has affected their clients' holdings. The latest example is Unicon Securities. Here the broker used clients' holding as margin in derivatives trading and also used clients' margin money to buy real estate. In short, money kept as margin by clients for their own trading was siphoned off by the broker for trading in the name of the promoters or through the company's proprietary account. There are other instances of brokers going bust. For example, Click2trade, Vasanti Securities and Royal International.

This does not mean that your discount broker will also go bust. But investors need to understand the business model and analyze the risk of dealing with such companies. They may charge a flat fee per trade to their clients. The fee might be negligible compared with other brokers who charge a percentage of the traded value. Trades are executed only if the client has a credit balance in the trading account. Clients are not given any margins on their stock holdings. Thus, the discount broker might be making money by investing the clients' surplus money in fixed deposits (FDs) or liquid funds. In any case, the broker will not disclose where the money is invested. This makes opening a demat and trading account with a discount broker a risky proposition.

It is best to stay away from such brokers. Also, many times, the opportunity cost of the money parked in the broker's account is higher than the actual brokerage paid. For instance, a person trades once a month and parks Rs 10 lakh with a discount broker as trades take place only if he has a credit balance in the trading account. Now, the opportunity cost of this money if put in a bank FD is close to Rs 80000 a year. Most people pay lower brokerage than this to their brokers. The brokerage amount charged by a discount broker might be substantially low but the loss of opportunity huge. Thus, it is better to stick to a reputed broker with a sizable net worth.