How brokers turn small investors into traders

Cut-throat competition among broking houses has resulted in brokerage rates falling to ridiculously low levels over the past few months. This is partly-good news for the small investors. But what is not so good for these investors is that brokerages are trying their best to make them trade as frequently as possible in order to make up for the low-broking charges. It may be in the form of a persuasive customer service representative, or a burst of SMS and e-mail messages.

Broking business is getting competitive by the day, with one broker claiming to charge less than the competitor. But, in the end all charge more or less the same, often billing small retail investors through other charges. A few small retail investors ET spoke to mentioned that their trading frequency had certainly increased.

Mumbai-based Rasik Shah, a 42-yearold small retail investor, who has been investing in equities from the past 10 years said, “Every time I call my broker (one among the top three retail brokerages), the customer service representative would not allow me to hang up the call unless I bought or sold something. And they are so convincing that one actually bites the bait.”

Bharat Dave, 37-year-old executive said, “We receive an overload of information from our broker on our mobiles, emails. And often we are lured to buy into their recommendations for a short timeframe .” Over the past one year, brokerage charges have almost halved to around 15-20 paise for Rs 100 worth of delivery trades and 3-5 paise for Rs 100 worth of intra-day trades. Also, retail investors are a fickle lot. They come rushing in hordes during a booming market, and then vanish for months when the market corrects. So, brokerages have no option but to extract the maximum possible brokerage out of them when the going is good.

Almost all brokerage houses go a step further by offering small retail investors margin trading facility. Margin trading is the use of borrowed money to buy securities with the expectation of magnifying profits. It can lead to greater returns, but is also very risky. Brokerage houses, often, are more than happy to offer you margin. Sometimes these margins go up to fivetimes your portfolio size and are offered at interest rates as high as 18% per annum.

ET tried to speak to brokers. They denied the charges that they are converting small retail investors into traders. In fact, brokers mentioned that since they have the expertise through dedicated high quality research, they are offering a better chance for small retail investors to make money free of cost.

According to Gaurav Mashruwala, a certified financial planner, “The greed of quick returns is luring many small retail investors into trading. Investment in equities should be for the very long term, where returns are high and risks are lower. When one does day-trading , the probability of returns are very low, but the risks are very high. So, ideally, small retail investors must avoid getting into this trap of churning stocks very often.”