What Happens if Your Broker Goes Bankrupt?

 

So guys today, we have a topic which is equally important for both investors and traders. I recommend you watch this video very carefully.

Have you ever wondered what would happen if your broker goes bankrupt? Now for a lot of you, I’m sure this thought would not have crossed your mind, but the reality is that every year tons of brokers go out of business.

If you don’t believe that, take a look here. This is the list of all the brokers who have defaulted recently and their clients had to go through a lot of frustration and a lot of mental agony. That is why it is very important to understand how to deal with such a situation and more importantly, how to avoid getting into such  a scenario.

Let us understand this with an example. Let’s say Mr. Sharma got the bad news that his broker has gone out of business. So what do you think will be going on in his mind? Well, of course he will be very concerned and specifically he will be concerned about two things.

What will happen to the shares that he had bought through this broker and number two, what will happen to the money that he had deposited in this broker’s account? Hence let us go one by one. Let’s start with the shares first. So when we buy shares through a broker, here is what happens.The broker sends our buy order to the stock exchange.

It can be in NSE or BSE and the stock exchange in turn matches that order with the Seller. Two working days later, these shares are given to us, but the shares are not sent into the broker’s account. The shares are actually sent out to our demat account, which is a completely different account altogether.

Now this is something that a lot of people don’t know.They say that when I log into my broker’s account, I can see the shares and that is where the shares are stored.Though you can and read see the shares from the broker’s account, they’re actually stored in the demat account.

The reason you can see these shares in your broker’s account is because your broker’s account is linked with the demat account. Let me give you guys a quick example. This, right here is my portfolio that I have through Zerodha and it can see all the different shares that I bought through Zerodha. Though I can see them in Zerodha, these shares are actually not stored in Zerodha.

They are stored in my demat account, which is hosted by CDSL. So what does it all mean for Mr. Sharma? Well, this is actually good news for Mr. Sharma. It is because his shares are perfectly safe in his demat account and he does not need to worry about them because the Demat accounts are actually provided by only two entities, NSDL and CDSL and both of them are backed by the government. Even if the broker goes out of business, the shares that are stored in these accounts are perfectly safe.

Now, the other thing Mr. Sharma is worried about, is the money that he had transferred in the broker’s account. For that, we have both good and bad news for Mr. Sharma. Now the good news is that SEBI, the stock market regulator, has already thought about this scenario as there are so many brokers who go out of business. This is something which happens almost every other month. So what SEBI has done is along with the stock exchanges, BSE and NSE, they have created a fund called investors protection fund.

If your broker goes bankrupt, you can raise a complaint to the stock exchange and get some of those funds back, but here’s the bad news for Mr. Sharma.

First, the reality is that the whole process of recovering the funds, the paperwork, the due diligence, all the validation that the exchanges have to do, can be very tedious and time consuming.There is also a chance that you might not get your funds back.

Secondly, and I think that this is more important, is that the maximum amount that Mr Sharma can recover is only Rs. 25 Lakhs. So what is the learning here? What is that we need to do right now so that we don’t get into a situation like Mr.Sharma?

The first thing that is very obvious is that you should always search for well established brokers. Second thing, which is, I think again, very obvious, is don’t keep free cash lying around in your trading account. Let’s say you have 10 or 20 lakhs rupees, and if you’re not buying any shares from that, then why do you need to put that much money in the trading account?

Transfer the unutilized funds back to your bank account. The next thing that you need to keep in mind is that you need to check with your broker about your Demat provider? Is it CDSL or NSDL? After you find that out, go and download the app of CDSL or NSDL, whichever is relevant to you and check whether all your shares there are available or not.

So that is it guys. This is what I wanted to talk about in this video. I hope that you guys will take this video seriously and take some corrective actions before it becomes too late.

So guys today, we have a topic which is equally important for both investors and traders. I recommend you watch this video very carefully.

Have you ever wondered what would happen if your broker goes bankrupt? Now for a lot of you, I’m sure this thought would not have crossed your mind, but the reality is that every year tons of brokers go out of business.

If you don’t believe that, take a look here. This is the list of all the brokers who have defaulted recently and their clients had to go through a lot of frustration and a lot of mental agony. That is why it is very important to understand how to deal with such a situation and more importantly, how to avoid getting into such  a scenario.

Let us understand this with an example. Let’s say Mr. Sharma got the bad news that his broker has gone out of business. So what do you think will be going on in his mind? Well, of course he will be very concerned and specifically he will be concerned about two things.

What will happen to the shares that he had bought through this broker and number two, what will happen to the money that he had deposited in this broker’s account? Hence let us go one by one. Let’s start with the shares first. So when we buy shares through a broker, here is what happens.The broker sends our buy order to the stock exchange.

It can be in NSE or BSE and the stock exchange in turn matches that order with the Seller. Two working days later, these shares are given to us, but the shares are not sent into the broker’s account. The shares are actually sent out to our demat account, which is a completely different account altogether.

Now this is something that a lot of people don’t know.They say that when I log into my broker’s account, I can see the shares and that is where the shares are stored.Though you can and read see the shares from the broker’s account, they’re actually stored in the demat account.

The reason you can see these shares in your broker’s account is because your broker’s account is linked with the demat account. Let me give you guys a quick example. This, right here is my portfolio that I have through Zerodha and it can see all the different shares that I bought through Zerodha. Though I can see them in Zerodha, these shares are actually not stored in Zerodha.

They are stored in my demat account, which is hosted by CDSL. So what does it all mean for Mr. Sharma? Well, this is actually good news for Mr. Sharma. It is because his shares are perfectly safe in his demat account and he does not need to worry about them because the Demat accounts are actually provided by only two entities, NSDL and CDSL and both of them are backed by the government. Even if the broker goes out of business, the shares that are stored in these accounts are perfectly safe.

Now, the other thing Mr. Sharma is worried about, is the money that he had transferred in the broker’s account. For that, we have both good and bad news for Mr. Sharma. Now the good news is that SEBI, the stock market regulator, has already thought about this scenario as there are so many brokers who go out of business. This is something which happens almost every other month. So what SEBI has done is along with the stock exchanges, BSE and NSE, they have created a fund called investors protection fund.

If your broker goes bankrupt, you can raise a complaint to the stock exchange and get some of those funds back, but here’s the bad news for Mr. Sharma.

First, the reality is that the whole process of recovering the funds, the paperwork, the due diligence, all the validation that the exchanges have to do, can be very tedious and time consuming.There is also a chance that you might not get your funds back.

Secondly, and I think that this is more important, is that the maximum amount that Mr Sharma can recover is only Rs. 25 Lakhs. So what is the learning here? What is that we need to do right now so that we don’t get into a situation like Mr.Sharma?

The first thing that is very obvious is that you should always search for well established brokers. Second thing, which is, I think again, very obvious, is don’t keep free cash lying around in your trading account. Let’s say you have 10 or 20 lakhs rupees, and if you’re not buying any shares from that, then why do you need to put that much money in the trading account?

Transfer the unutilized funds back to your bank account. The next thing that you need to keep in mind is that you need to check with your broker about your Demat provider? Is it CDSL or NSDL? After you find that out, go and download the app of CDSL or NSDL, whichever is relevant to you and check whether all your shares there are available or not.

So that is it guys. This is what I wanted to talk about in this video. I hope that you guys will take this video seriously and take some corrective actions before it becomes too late.