Dabba Trading is an off-exchange trading operation conducted in absence of stock exchanges or registered broker companies. People tend to seek some trading options through internet due to simplicity of access and quickness of execution of orders. However, before deciding on the choice of a trading service, one should know about possible legal and financial risks.
According to SEBI investor guide, Dabba Trading is illegal in India and does not provide necessary protection for the trade performed by using recognized stock exchanges and regulated intermediaries.
What is Dabba Trading
In simple terms, Dabba Trading is a placement of order which is not executed on recognized stock exchange. The price may be dependent on market changes, however, the actual trade is made outside of stock exchange environment.
In historical context, SEBI defined the Dabba Trading as securities trading which is done outside of recognized stock exchanges.
It should be distinguished from regular stock market trading which takes place via authorized market participants and recognized stock exchanges. There are also records and regulatory systems which guarantee safety of the trade for investor.
Why It Is Illegal
The main reason for being illegal is that Dabba Trading operates outside of recognized exchange system. The recognized markets have set of regulations aimed at providing safe and equal conditions for trading and recording, and protecting investors.
If the trade takes place outside of recognized stock exchange, the benefits of safety and guaranteed trade cannot be used. According to the guidance of SEBI investors should not perform Dabba Trades, as it provides no advantage over guaranteed exchange based trade.
Another problem is that it lacks regulation. A trader working with unregistered intermediary company has less opportunities in case of problems.
What Are the Potential Risks?
Some of them include:
1. Absence of exchange protection
Transactions are not conducted on the official exchange system. That can cause problems in obtaining necessary protective measures which are usually available on the regulated market.
2. Counterparty risk
The party conducting transactions in the opposite direction may refuse to pay if the customer obtains profit from his/her transactions. It has already been mentioned above that historical government investor material warns about the absence of protection from counterparty default in the case of off-exchange trading.
3. Disputes issues
On the regulated markets there are established means of resolving investor complaints and disputes. In the case of illegal off-exchange trading it will be much more difficult.
4. Terms and fees issues
Some trading services may advertise relatively low fees or high rates of return. Nevertheless, it is necessary to consider all terms of cooperation, fees, conditions of withdrawal, etc., and the legitimacy of the service in question.
What About Online Dabba Trading in India?
Due to the development of the Internet trading services became much easier to find. However, moving a certain activity online cannot make it legitimate automatically.
The site Dabba Trading App mentions that Dabba Trading is not recognized by stock exchanges and licensed brokers and suggests that the user examines all aspects of trading – legality, risks, charges, regulation before choosing any service.
Thus, those people who are looking for online dabba trading in india should not evaluate any website, application design, low fees or rapid profit promises alone. The regulation status should be taken into account at once.
Is Dabba Trading Similar to Normal Trading?
No. Regular stock market trading is conducted on the official exchanges and regulated intermediaries. There investors obtain proper documentation and can use the resources of regulated market system.
Unlike regular transactions, Dabba Trading is conducted independently of it. This fact is crucial because the modern website or application design does not mean the legality of the transaction performed through it.
Also, the Dabba Trading App website suggests that the user should conduct research, comparison, examine risks, regulatory status of the chosen service.
What Traders Should Do Instead?
Before engaging in any kind of trading activity, learn about the working of the market and the risks involved. Verify whether the broker or the intermediary is duly registered. Do not rely on assurances of large or guaranteed profits.
SEBI also recommends that the investors should refrain from dealing with unauthorized brokers or intermediaries and conduct proper verification before making investments.
Any trader looking into online dabba trading in India must ensure that he/she first understands the legal aspect of the same and makes use of legitimate exchanges and authorized intermediaries for exchange-based trading.
Conclusion
Dabba Trading may seem easy due to the fact that it offers itself to be a convenient way to join in the price movement of the market. However, its off-market status makes it an area fraught with various risks, financial and otherwise. SEBI has made it clear that Dabba Trading is unlawful.
The main takeaway is very simple – never engage in a trading service just because of its promised ease or cost-efficiency.
