Greed and the ill-conceived lure of quick money is the biggest enabler of trading activity in the markets. Those who trade constantly try finding ways to make more by increasing their trading capital. And those who don’t, lured by greed, are constantly seeking out someone to trade on their behalf or manage their money.
Like everything else in life, higher rewards when trading usually carries higher risk. An important fact that people ignore is that the risk of losing capital always accompanies any asset that earns you more than Government securities or bank FDs. There is no risk-free trading. From my experience in the markets, less than 1% of active traders make more than bank FD returns in the long run. While this 1% is minuscule, the odds of succeeding in trading are similar to those who attempt businesses.
Traders can increase their capital size by waiting out until their own capital becomes larger over time if they make profits. But as I said, greed is the enabler of trading. Most often, traders try to find shortcuts to make money faster, either by borrowing money or trading for others. Usually, the easier option is to get carried away by the short-term performance and borrow money or take a loan, hoping that trading profits will be higher than the cost of borrowing. But the odds of succeeding drop significantly when trading on borrowed money, thanks to the looming fear of debt. The other way is by trading with others’ money, commonly, for a fixed % of the asset under management as fees and/or profit-sharing. While the intent is always to profit, the odds are always stacked against this. Most traders lose money in the long run, which means most people who allocate capital to such traders also lose money. Over 80% of all complaints that get lodged with the regulator are for losses due to unauthorized trading. A large portion of these are customers who are sold to greed without understanding the risks properly, allocating capital to trading, and then trying to get back the capital in case of losses by complaining to the regulator.
Over the last few decades, there have been constant amendments in regulations around managing others’ money. We keep getting this query on social media and TradingQ&A from traders on how to build a business of managing others’ money. This post will explain the legally permissible ways, the grey ways, and those that are black or not allowed under current regulations.
The legally permissible ways are registering with SEBI as an AMC, PMS, AIF, or RIA. Below is an overview (and here is a document with more details).
Asset management (AMC) license or setting up a Mutual fund
Mutual funds are the most popular vehicle to manage others’ money. But, setting up an AMC is extremely tough. The net worth requirement of Rs 50 crores is just a start. A mutual fund has clear guidelines on how a fund manager should construct the portfolio and doesn’t allow as much freedom. Limited leverage is allowed, but intraday trading isn’t. F&O can be used only to hedge. Since mutual funds are probably the most regulated equity product, you can accept customers who are willing to invest as little as Rs 100. Fees can be collected as a % of the asset under management.
Portfolio management (PMS) license
Easier to set up when compared to an AMC. A net worth requirement of Rs 5 crores and flexibility in terms of portfolio construction. But this also means higher risk and hence can be offered only to customers who can invest at least Rs 50L. Leverage or intraday trading isn’t allowed, and F&O can be used only to hedge. Fees allowed as % of AUM or a % of profits. Unlike MFs and AIFs, PMS doesn’t allow you to pool funds from clients and hence requires customization, making it tougher to run operationally.
Alternate investment fund (AIF Cat 3) or Hedge fund
Easier to set up as compared to an AMC and broadly left to the law of contracts. The minimum size to start a fund is Rs 20 crores. No rules around portfolio construction; can use F&O to speculate, leverage up to 1 time, intraday, and short selling are allowed. Since this carries a higher risk, the minimum investment amount that can be taken from customers is set at Rs 1 crore. Fees can be charged as a % of AUM or a % of profits.
Registered investment adviser (RIA)
While the above three allow you to collect capital from customers and flexibility to collect fees from the AUM, the entry barrier is quite high. On the other hand, an RIA can only advise, and the customer is required to execute the trade. It is much easier to be an RIA compared to others. The networth requirement is Rs 5L, and you can advise any customer (no minimum AUM requirement). But an RIA cannot trade on behalf of the customer. The fees have to be collected separately from the customer, either as a fixed fee or as % of AUM. No profit-sharing is allowed.
Expressing your views on individual stocks or market direction is allowed on social media or public platforms so long as you do not hold yourself out as an investment advisor. You will need to get yourself a license if you start collecting fees for advice or holding yourself out as one. RIA license if the advice is specifically tailored for an individual, and RA (Research analyst) if the same advice is given out to a group of people for a fee.
The regulatory black and grey ways
While the above are permitted ways to manage others’ money, there are alternative structures used for this; some of which are in a grey area (tough to enforce or a loophole around an existing regulation) and some that are black (not allowed under current regulations). Here are a few.
Trading by using client login credentials
A customer willingly shares login credentials to their trading account with a trader or adviser. There is usually a profit-sharing arrangement, and in some cases, the trader/adviser also guarantees to take up either the full or portion of any losses made. This kind of arrangement is not allowed as per regulations but almost impossible to enforce. As soon as the adviser collects a fee, they are required to register as an RIA. And as an RIA, you are not allowed to execute trades on behalf of the customer. This arrangement is exceedingly common. There are also many cases where customers actively seek out folks on social media who seem to be generating trading profits to manage their accounts.
Using Broker/Sub-broker/AP – Client relationship
Traditionally, stockbrokers have also doubled up as advisers. The broker is exempted from RIA registration for any incidental advice as part of running the broking business. Somewhere along the way, some brokers also extended this advisory to start trading on behalf of the customers. Often, relationship managers working for brokers who have brokerage revenue targets have resorted to mis-selling using supposedly “low risk-high return” strategies to customers to meet their targets. This trading on behalf of customers is easier because brokers and their relationship managers have access to dealing terminals where orders can be placed without needing client login credentials. This type of arrangement usually doesn’t have profit sharing as brokers aren’t allowed to take any money apart from brokerage from the customer. But to earn, the account is churned, and brokerage revenue generated instead. And as you’d imagine, the more the churn, the higher the risk of losing money.
Brokers acting as quasi wealth managers is not allowed as per regulations. This is also the main reason for several brokers going bankrupt in recent years by losing money while managing customers with large accounts, and to cover losses, using one client’s margins for another’s or for the broker’s own account, move securities between clients until it became impossible to hide due to the tightening regulations.
But, becoming a broker isn’t easy. Brokers can appoint franchisees or sub-broker or authorised persons (AP) to help expand their business. Many brokers also offer dealing terminals to franchisees to support the business introduced by them. Many of these franchisees use this access to dealing terminals to manage money. Earnings could be both as brokerage revenue generated and/or potentially profit sharing as well.
This quasi wealth management without a license by relationship managers, brokers, or sub-brokers/APs trading on behalf of customers by promising a certain return has probably caused the maximum loss to customers historically. SEBI even removed the concept of sub-brokers as the main broker could easily pass on the buck to the sub-broker who had their own separate SEBI registration in case of complaints around unauthorised trading. Today a broker can only appoint an Authorised Person (AP), where the AP has no SEBI registration, and all liability from the AP falls on the broker.
FYI: At Zerodha, there is no relationship manager concept, no AP has been given dealing terminals, and no one who is on our payroll has any revenue targets.
Setting up a company & trading on investors capital
A company or limited liability partnership (LLP) is created with those wanting their money to be managed being shareholders or partners. Their pooled funds are then used as trading capital. There are a couple of issues with this.
Firstly, an LLP with the objective of investing or trading is not allowed, so people use an alternate objective to create the LLP. This is a clear violation of MCA (Ministry of Corporate Affairs) rules. In the case of a Private Limited or Public Limited company, if more than 50% of revenue comes from financial income (trading), then the company is required to get registered as an NBFC (Non-Banking Financial Corporation) with RBI. One way to avoid this NBFC registration is by becoming a stockbroker and registering with SEBI. Both these registrations come with their compliance requirements, and as a stockbroker, an added cost of having to run a full broking stack as the firm cannot rely on other brokers for trading.
This could also be set up as a partnership firm to avoid the NBFC or SEBI registration requirement, but the issue with a partnership firm is that all partners have unlimited liability. In trading, where potentially there could be unlimited losses, partnership firms are not the right structure for investors.
While running trading through a setup like this allows flexibility in trading and collecting fees, you can’t actively seek new investors in the business promising returns from trading the markets. This would qualify the entity to register as an AIF. Check this SEBI order (Page 14, Point ix) banning the entity and the promoters for actively seeking capital to be invested into the stock markets as an LLP (without AIF license). So at best, if you did create a company or partnership firm, this can be set up only with family (white or allowed) and friends (grey) as a proprietary trading firm (grey). But you can’t actively seek capital from outsiders to manage (black).
Hopefully, you find this post useful. Do consult your chartered accountant or lawyer if you act based on anything mentioned in the post above.
If you have any questions or comments,join the conversation on Trading Q&A
Best,
FAQs
There is usually a profit-sharing arrangement, and in some cases, the trader/adviser also guarantees to take up either the full or portion of any losses made. This kind of arrangement is not allowed as per regulations but almost impossible to enforce.
How can I legally trade other people's money in India? ›
Refer to SEBI Rules on this. you can invest money of others in share market after obtaining trading license as broker from the stock exchange or sub-broker license from any broker agency. sub-broker is easy task for you because it may obtained by paying security only and no need to qualify any exam.
Can I pay someone to trade stocks for me? ›
You can hire a broker, an investment adviser, or a financial planner to help you make investment decisions. You can also get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual fund companies, and insurance companies.
Is it possible to put trade in multiple clients at once? ›
Multi-client trading is quick and easy so you can trade in or out of one or more stocks for many clients with just a few mouse clicks.
Can I give someone money to invest for me? ›
Such investors can use a power of attorney to make their investments. By signing a power of attorney document, you can assign a person to carry out investments on your behalf.
What do I need to do to trade other peoples money? ›
You cannot trade securities for others without becoming licensed as an investment professional. Investment professionals must be registered with the Securities and Exchange Commission or have a federal license.
Can I invest 1 crore in Zerodha? ›
You can add a maximum of Rs 1 Cr using internet banking(using the payment gateway) and Rs 2 Lakhs using UPI from Kite's Add Funds page in a single transaction.
What is the punishment for illegal forex trading in India? ›
Engaging in unlawful forex trading in India is punishable by imprisonment or a fine under the Foreign Exchange Management Act (FEMA), 1999.
Is spoof trading illegal in India? ›
SEBI's new Anti-spoofing rule
And it has laid down the various parameters and rules for penalising those involved in spoofing in its circular issued on March 26. Starting from April 5 2021, SEBI will start penalising all those involved in spoofing activities by suspending their trading account temporarily.
What is freelance trading? ›
It simply indicates someone who works but isn't employed by a company or by another individual. Instead, they work for themselves and are in control of what they do. They might even employ others. Both freelancers and sole traders are self-employed and fall into this category.
Yes, private company shares can be transferred to a spouse or children. The company's articles of association may need to be amended to allow for this and the shareholders to approve it by passing a special resolution.
Can you buy shares directly from a person? ›
To buy stocks, you'll typically need the assistance of a stockbroker, since you cannot simply call up a stock exchange and ask to buy stocks directly. When you use a stockbroker, whether a human being or an online platform, you can choose the investment that you wish to buy or sell and how the trade should be handled.
Can one person open two Zerodha accounts? ›
No, only one trading account can be opened with one PAN with one broker. However, a new non-individual trading and demat account, in the name of a company, partnership firm, LLP or HUF can be opened even if one holds an individual account with the same broker.
How many times I can trade in a day? ›
As a retail investor, you can't buy and sell the same stock more than four times within a five-business-day period. Anyone who exceeds this violates the pattern day trader rule, which is reserved for individuals who are classified by their brokers are day traders and can be restricted from conducting any trades.
Is it illegal to have 2 trading accounts? ›
It is perfectly allowed to have multiple trading accounts at more than one brokerage. There's no legal limit to how many investment accounts you can open. In fact, having multiple brokerage accounts can offer more opportunities, especially if you want to make different types of investments.
Can you invest in stocks with friends? ›
Friends can invest in stocks together in a few different ways. A set of friends can form an investment group or club, where they pool money and agree on a stock-picking strategy. It's also possible for friends to invest in fractional shares.
How much stock can I gift tax free? ›
The annual gift tax exclusion for 2022 is $16,000. This means any gifts with a fair market value of $16,000 or less are not taxable. However, any gifts with a fair market value over $16,000 are taxable at the gift tax rate.
How much does it cost to pay someone to invest your money? ›
How Much Do Financial Advisors Make Off Your Money?
| Average Financial Advisor Fees by Type |
|---|
| Fee Type | Typical Cost |
|---|
| Percentage of AUM | 0.59% – 1.18% per year |
| Fixed Fees | $7,500 – $55,000 |
| Hourly Fees | $120 – $300 per hour |
1 more rowMay 15, 2023
Because of the PDT rule, traders without 25k are not allowed to day trade using margin. A cash account solves this problem. All transactions clear overnight and your funds are available the next trading day. Unfortunately, cash accounts cannot take spread trades, however, they are perfect for directional trading.
How to trade with only $100? ›
How to Get Started Trading with $100
- Look for high-probability trade setups. ...
- Don't place your stops too tight. ...
- Don't shoot for high reward-to-risk ratios. ...
- Manage your trades actively. ...
- Follow your trading plan. ...
- Review your trades. ...
- Grow your account responsibly.
First, pattern day traders must maintain minimum equity of $25,000 in their margin account on any day that the customer day trades. This required minimum equity, which can be a combination of cash and eligible securities, must be in your account prior to engaging in any day-trading activities.
Is Zerodha 100% safe? ›
Yes, Zerodha is a legitimate stock brokerage firm in India. It is registered with SEBI, CDSL and all major stock exchanges in India. As with other popular brokers, Zerodha works under the regulations laid by SEBI and RBI.
Can I buy 2 lakh shares in Zerodha? ›
The maximum quantity allowed per order is 100000 as per Zerodha's risk management policy. Orders that exceed these limits are rejected.
Can I withdraw 2 lakhs from Zerodha? ›
There is no upper limit to the amount of money that can be withdrawn from the trading account. Withdrawal limit is subject to availability of withdrawable balance in the trading account. To learn more, see What is the withdrawable balance?
Can I go to jail for forex trading in India? ›
As per the Act (under Section 13 (1C), a forex trader who has indulged in illegal activity may also be jailed for up to five years. Forex and currency trading in India is legal but failure to adhere to authorised brokers or permitted currency pairs is a penal offence under FEMA.
Which type of trading is banned in India? ›
In India, however, forex trading platforms are outlawed. While currency trading is not possible on the foreign exchange market, it is possible on the stock exchange. The Foreign Exchange Management Act makes binary trading illegal (FEMA).
Which forex is legal in India? ›
Is forex trading legal in India? Yes, but unless you are just exchanging cash at the airport while traveling through India, most SEBI-regulated brokers that offer forex trading will be limited to exchange-traded forex products (such as currency derivatives).
What is the biggest stock market frauds in India? ›
What are the biggest financial frauds in India? Harshad Mehta, Satyam, Ketan Parekh, NSEL, and Saradha are only a few of the largest financial frauds to occur in India. Both individual investors and the Indian economy as a whole have lost a great deal of money as a result of these scams.
What is the biggest stock frauds of India? ›
The scam was the biggest money market scam ever committed in India, amounting to approximately ₹ 5,000 crores. The main perpetrator of the scam was a stock and money market broker Harshad Mehta. It was a systematic stock scam using fake bank receipts and stamp paper that caused the Indian stock market to crash.
What are some examples of illegal trading? ›
Illegal Insider Trading
For example, suppose the CEO of a publicly traded firm inadvertently discloses their company's quarterly earnings while getting a haircut. If the hairdresser takes this information and trades on it, that is considered illegal insider trading, and the SEC may take action.
Independent Trader Salary
| Annual Salary | Monthly Pay |
|---|
| Top Earners | $182,500 | $15,208 |
| 75th Percentile | $110,000 | $9,166 |
| Average | $94,266 | $7,855 |
| 25th Percentile | $47,000 | $3,916 |
Getting started as a freelancer
- Set up a website. Establishing an online presence for yourself is essential. ...
- Order business cards. ...
- Get a DBA or sole proprietorship. ...
- Protect your future. ...
- Focus on productivity. ...
- Promote and network. ...
- Know what's out there.
Whether they're trading for themselves or working for a trading shop and using the firm's money, day traders typically don't get paid a regular salary. Instead, their income is derived from their net profit.
Do you pay tax when you transfer shares? ›
Capital gains tax and gifting
As previously discussed, if you give existing stock to someone else, your cost basis will transfer to them. Since you didn't sell the investment, you won't owe any capital gains taxes — and the recipient won't pay taxes until they sell the shares.
Can I sell my shares without a broker? ›
How can you sell stocks without a broker? The easiest and most common way to buy and sell stocks is through a brokerage, but that isn't necessarily the only way. You can trade stocks without a broker through direct stock purchase plans with companies.
Do you pay tax when you sell shares? ›
Capital Gains Tax (CGT) is normally charged at a simple flat rate of 20% when you sell shares unless they are in a CGT free investment such as an ISA or qualifying pension. If you only pay basic rate tax and make a small capital gain, you may only be subject to a reduced CGT rate of 10%.
Can I trade without a broker? ›
You can open a Demat Account on your own by directly contacting the Depository Partner. This process does not require a broker or any third-party authority. Here are the steps: Find a DP on the website of CDSL or NSDL.
Can I directly sell shares without buying? ›
Money can be made in the equities markets without actually owning any shares of stock. Short selling involves borrowing stock you do not own, selling the borrowed stock, and then buying and returning the stock only if and when the price drops.
How do I transfer shares to an individual? ›
Share Transfer Form
As per the law, a private company cannot directly transfer shares to a person, but an existing shareholder can do so. When the form is filled, the transferor and the transferee will sign the document. With this, the company can then affix its common seal on the document.
How many bank account can be linked to Zerodha? ›
Three bank accounts can be mapped to the Zerodha account.
Market data shows that Zerodha reported a 1% month-on-month decline in its client count to 6.4 million but its market share rose 22 basis points to 19.2%. "Total active user clients at NSE rose 2.7% YoY but fell 2.1% MoM to 33.6m.
Can we have 2 portfolios in Zerodha? ›
Click on “Manage accounts”, and you will have the option to add more accounts. You will need to select an account where you want to process the transaction when you are adding the same. If in the future you need to merge or delete accounts, it can be done with the “Manage Account” section.
Can I day trade with $5000? ›
A Non-Pattern Day Trade account requires a minimum of $5,000 in margin equity. All trades in Margin accounts are subject to Day Trade Buying Power Limitations. Satisfying a day trade call through the sale of an existing position is considered a Day Trade Liquidation.
Can you day trade with $2000? ›
The minimum equity requirement for a pattern day trader is $25,000 (or 25% of the total market value of securities, whichever is higher) while that for a non-pattern day trader is $2,000.
What is the rule for 3 trades a day? ›
A day trade is when you purchase or short a security and then sell or cover the same security in the same day. Essentially, if you have a $5,000 account, you can only make three-day trades in any rolling five-day period. Once your account value is above $25,000, the restriction no longer applies to you.
Is it safe to keep more than $500000 in one brokerage account? ›
Is it safe to keep more than $500,000 in a brokerage account? It is safe in the sense that there are measures in place to help investors recoup their investments before the SIPC steps in. And, indeed, the SIPC will not get involved until the liquidation process starts.
Should you have more then $500,000 dollars at one brokerage? ›
It's OK to invest more than $500,000 through a good investment company. Just make sure that you pick a company that offers low fees.
Can I trade with someone else's account? ›
That's illegal unless you're an investment professional. There are a lot of legal requirements to manage other people's money.
What is considered illegal trading? ›
Insider trading is deemed illegal when the material information is still non-public and comes with harsh consequences, including potential fines and jail time. Material non-public information is defined as any information that could substantially impact that company's stock price.
Is it legal to trade crypto for someone else? ›
Trading cryptocurrencies is completely legal in the United States on verefied exchanges.
Is copy trading legal in the U.S.? Yes, copy trading is legal in the U.S. – provided that your broker is properly regulated by either the Commodity Futures Trading Commission (CFTC) in the case of forex or the Securities and Exchange Commission (SEC) for stocks.
Can you trade with only $100 dollars? ›
Minimum Deposit: Your broker of choice should have a minimum deposit requirement of $100 or less. Otherwise, you can't deposit just $100. This is why you need to trade on margin with leverage. For example, if you are in the United States, you can trade with a maximum leverage of 50:1.
Is trading illegal in USA? ›
While day trading is neither illegal nor is it unethical, it can be highly risky. Most individual investors do not have the wealth, the time, or the temperament to make money and to sustain the devastating losses that day trading can bring.
How long do you go to jail for insider trading? ›
As to the criminal penalties for insider trading, the maximum sentence for an insider trading violation is 20 years in federal prison. The maximum criminal fine for individuals is $5 million, and the maximum fine for a company is $25 million.
What is a trading violation? ›
This violation occurs when you buy a security without enough funds to cover the purchase and sell another, at a later date, in a cash account. The settlement of the buy and the subsequent sell don't match, which is a violation. This is also known as a "late sale." Example.
Do you need a license to invest other peoples money in crypto? ›
The Series 7 License – Needed for Cryptocurrency Securities
This means these crypto will be regulated by the SEC. Any person using someone else's assets to buy and sell crypto should consider obtaining a series 7 examination.
Do I need a license to be a crypto broker? ›
Crypto businesses and exchanges need a license to comply with relevant laws and regulations, establish customer trust, and expand their services.
Can I give my friend crypto? ›
Crypto can be gifted as gift cards or by sending coins directly to a digital wallet. Crypto gifts are taxed by the IRS as capital gains.
How much money do I need for copy trading? ›
initial deposit of USD $250 to ensure that you have sufficient funds to manage your risk.
How do you copy someone's trade? ›
Copy trading in 5 easy steps
- Choose a Strategy Manager.
- Make a deposit – from as little as $100.
- Automatically copy the Strategy.
- Cash in when they profit.
- Share a percentage with the Strategy Manager.
Copy Trading. Copy-trading involves linking your portfolio directly (and automatically) to that of another trader. This means all trades are made by the primary trader and are automatically copied by those following.
How to day trade without $25,000? ›
Let's look at each one of these options.
- Become highly selective with your strategy. This goes without saying, but the more selective you are with your trades, the more you're likely to succeed in trading. ...
- Open a CASH-ONLY account. ...
- Open Multiple Brokerage accounts. ...
- Trade Forex and Futures to avoid the $25k minimum.
With a $1000 account, you will typically place a trade with a lot size of between 0.05 to 0.1. This equals to $0.50 to $1.00 per pip. 0.05 lots is 5 micro lots, and 0.1 lots is one mini lot. The lot sizes given above are averages and can change depending on your trading setup and risk tolerance.
Can you make money day trading with $1000? ›
If you have a profitable trading system averaging 15% return a year: $1000 account will make you $150. $10,000 account will make you $1500.
