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Giving access to your asset is something which you should be very careful.
In the earlier blogs I have covered the most basic queries on the Indian stock market and today I will discuss trading and Demat accounts. Many of you who are about to enter the market, might be thinking of opening this account. What exactly does this two different account mean?
So this is one important thing to know, not only for people who want to join the stock market but also for people who are already investing in it. Many times we have heard some scams about the brokers cheating their clients. It only happened because the client is not aware of the modus operandi of these brokers.
So you must understand this factor that, you can not only lose money in the market by choosing a bad stock and doing a bad investment but also you can lose money because of these kinds of frauds. There are two accounts when it comes to trading and investing in the Indian Stock Market, Demat and trading accounts.
Demat account is a kind of bank account where you keep your shares. In the trading account, you give money to your broker. I am sure most of you might have signed POA (Power Of Attorney). Many people who open their trading account with any brokers are not aware of this whole philosophy of POA. Generally, they ask you to sign every document on the account opening form, what exactly they do with it? We will learn soon.
Demat account is your bank account of shares. Every time you go and buy the shares it gets deposited there. There are two depositories NSDL and CDSL. They give you a DP id which is more like a bank account id or bank account number. So you get a DP id in which your shares get stored.
Now, what is a trading account? It is something that gets opened at the broker's end. To buy and sell a share in the Indian market you need to go through a broker. If you want to buy, you will pay the amount and get the stocks from your broker. When you want to sell you will give your stocks, which your broker will further give to the exchange and in return, you will get the amount credited to you.
So trading account gets opened at the stockbroker level, the Demat account gets opened at your depository level. So they are two different accounts. Your broker can only ask you to open the trading account, Demat is not mandatory. You can keep your Demat account anywhere else. You can have just one Demat account and 10 trading accounts.
Now you know that though you have a trading account with 10 different brokers, you will keep all your shares into that one Demat account only.
Let’s now understand what is the trade flow? Every time you want to buy any shares for example Reliance shares, what will you do? You give your broker an instruction to buy 100 shares of Reliance. The broker sends that instruction to exchange. The exchange confirms the order. And the shares get allocated into your DP id.
So in the whole process, this broker comes into the picture in both buying and selling time. So it's very simple when you just want to buy it. You have a trading account and you bought the shares, it got deposited into your Demat account default. What about selling your shares?
Now that you have got shares into your account which is your DP account and broker has no control over it. Do you think if your broker goes and ask those shares from the depository, they will give him the shares? The answer is no. Now let’s understand the selling flow.
Again every time you want to sell your shares, what will you do?
Since the shares are kept in the Demat account with the depository, do you think they will give the shares to the broker? No, they won’t! Unless and until you are not authorizing your broker they will not give it to them. Authorization can be done in two ways, by POA and by DIS Slip ( Delivery Instruction Slip).
Through DIS slip you can give a physical form of authorization to your broker to deduct your shares from your DP account and give it to the exchange. But for a very long time, everything happened on electronic mode and brokers started taking a signature from your account called POA i.e the Power of Attorney of your account.
They get the POA signed from you that they can instruct the depository to deliver the shares to the exchange also. Now, when you do frequent buying and selling and you don’t want to give the DIS slip, this POA comes handy. Now you know that,
But the broker will convince you that it's very important to sign the POA. This is a very general practice from all the brokers and you have to be cautious here. But you have to say no if you don’t need it. If you are a passive investor going to invest every 6 months to 1 year and leave it for the next 5 to 10 years, you can simply say no to the POA.
If you just want to trade, you can simply say no to the Demat account. POA is voluntary and not mandatory. Another reason why I am stressing so much on POA is recently one fraud happened with a client, their broker did it. On the name of this convenience to sell the shares they get so many other clauses written and for common people like us, it's very difficult to comprehend this POA.
You have two choices, to be very careful when signing POA or decide whether you are going to do a lot of buying or selling or not. If not then simply instruct DIS slip every 6 months to 1 year when you are going to sell the share. If you are going to sign a POA, go and read all the clauses.
Sometimes in the name of signature and POA, they can take full access to your account, and correspondence with the company where you have invested. All these can be very dangerous for you. Am I asking you to go against the POA? Well yes! I am asking you to be careful when signing the POA, not just in the trading and DEMAT account but everywhere else.
Giving access to your asset is something which you should be very careful. Now that I had given so much negative thought against POA and created a kind of distress among the brokers from your side, some of you may think that should I revoke the POA? I already have opened an account and signed the POA, so can I revoke it?
Yes, you can ask back your broker to show the POA and read all the clauses. If anything apart from giving them access to getting depository to sell their shares for the delivery, you can get it revoked. You can get the complete POA revoked as well if you find anything fishy. Broker may refuse to do it, you can force them and also complain to SEBI.
Are you wondering what am I trying to say to you? I am not trying to tell you that you should not go for POA, but some frauds add so many other clauses and can get signed under the name of the POA to sell the share on your behalf. Just be careful before signing any POA, read all the clauses completely. It's your hard-earned money which you are going to invest in. So you need to know where exactly you lose money in the stock market.
CONCLUSION
You may lose money not just by bad investment or trade, this kind of situation can also happen. Unethical practices may put you in a place where you may lose your hard-earned saving.
So be very careful while opening the account and understand in a detailed way. First, decide whether you want to invest actively or passively. Based on that you can decide whether you want POA or DIS.
SEBI is there to protect you from everyone else in this system. But they can protect only when you know your rights or where you are signing. Be aware of it.
Take your own time and create an account, so that you will have peace of mind that your savings are protected.
If you are new to these blogs, I suggest you check out my other blogs on most basic queries on the Indian Stock Market which will help you build a strong base before you begin exploring,
1) Why does the stock market exist?
2) How does someone make money in the stock market?
3) Why do people lose money in the stock market?
4) What are the risks of investing in the stock market?
5) Why does the stock market go up and down?
6) How to invest in the stock market without taking anyone's help?
Kundan Kishore
Curator of A Complete Course on the Indian Stock Market.