When you open a brokerage account, you typically sign all the pages without reading either the print or the fine print.
You just sign away.
And that’s because reading through the Client Registration form takes time and patience.
Even if you are strapped for time, you must make the effort to thoroughly read and understand the Risk Disclosure Document (RDD) at the very least.
What is the Risk Disclosure Document (RDD)?
This document outlines risks involved in trading, and the brokerage’s policies on how it handles client risk.
Though the risks are general in nature, you must pay attention to how the brokerage deals with these. Specifically:
1. Whether the company allows clients to trade in illiquid or penny stocks. Many folks who are into smallcaps must chat with the company and clarify whether they would be allowed at all to trade in such securities.
Note that illiquid stocks also should MSME stocks that are listed on the BSE MSME and NSE Emerge platforms. These stocks are catching up in demand and it is possible that a client may not be allowed to trade in such stocks because of the company’ss riskk mitigating policies.
Many brokerages prohibit trading in Z group stocks and restrict buying of stocks in T2T segment.
2. Then there is the concept of “deemed penny stock.” I remember that when I wanted to invest in Yash Papers, I was given a torrid time by my broker despite Yash Papers not being a penny stock and I having sufficient stocks in my margin account.
The kicker is that the brokerage will not be liable for any loss of profits that you may have incurred because of their refusal to trade in stocks they consider as penny shares.
Therefore, it will be worth your while to figure out how your brokerage deals with smallcap trading and what is its idea of a deemed penny stock.
3. The brokerage, no matter what it says in advertisements, and no matter what the sweet talk is said, sets exposure limits based on the margins you have deposited. These are represented by credit in your account, bank transfers (if any, as on that day) and the stocks in your account after a minimum 30% haircut.
In addition, client profile, financial status and market conditions are also estimated before setting up exposure limits.
4. If the brokerage pays out any money on your behalf, even if you are late in making the pay in by a few hours, it will charge you interest at a minimum rate of 21%.
In addition, you will have to pay penalties in case the brokerage is penalized by the exchange because of your actions – for example, trading in FNO for stocks that have crossed permitted trading limits.
Therefore, if you don’t want to pay interest, you must transfer monies due on purchases or MTM losses immediately or by the next trading day.
Get this checked up from your broker. This is because 21% per annum may seem big when it works out to just 0.057% per day and when it is charged, it does not make a significant dent to your credit, and chances are that you will not notice it.
5. Typically, most brokerages close out margin trades by 3.10 PM. So if there’s a movement after the cut off time, you will lose out. Plan your trades well and know by what time your trades will be subjected to a square off by the brooker.
6. Brokerages will sell off your position when losses mount. Here’s an example:
You have Rs 1,00,000 as margin in your account.
The brokerage gives you 5x exposure.
You buy a stock worth Rs 5,00,000.
Now if the price of that stock falls and the transaction value drops by Rs 30,000 (30% of your margin), the firm will start squaring up your positions slowly. If the drop in value is at 50% of your margin, the firm will completely square up your position without informing you.
The firm will not be liable for any notional profits or lower losses you may have made after your position was squared off.
This 30% and 50% loss percentage is just an example. Your brokerage may set higher or lower limits.
So, if you are a frequent trader who plays medium-large, get this clause checked up before opening an account.
7. If there is some electronic failure and the broker’s trading system hangs, and you incur a loss, then the broker will not compensate you. This is true of all brokers and there is nothing you can do about it.
8. Okay, this is above and beyond the RDD.
After the RDD ends, there is a section that is called the TARIFF SHEET. Make sure that is filled up with the agreed rates at the time of signing the registration form.
Remember that in 9 cases out of 10, the broker is not out to rip you off. He wants to make brokerage and in that pursuit, he will keep sending you recommendations. This is normal.
However, there do exist a small percentage of brokerages that are up to no good and it is essential you must guard against them.
So, anytime you decide to sign up with a brokerage, do not forget to read the risks associated with your trading.