Have you heard a story like this before? The one where an AlgoTrader shows how much wealth they have accumulated thanks to Options trading?
Indians are trying their hand at trading in stocks and derivatives online. Many are talking about how they do it and showing their results. Some even make money by teaching others their methods.
But there’s a problem: not everyone is honest.
There are fake pictures and too-good-to-be-true stories everywhere, especially on social media like Twitter. They try to get people to join their Telegram group with the lure of free, profitable trading calls and then eventually attempt to monetise for ‘premium’ calls on apps like Rigipay etc.
There’s even apps that help these traders reach more people. But this has created some issues. There’s a lot of confusion about what’s allowed and what’s not. People are promising sage advice but because of that many people end up getting tricked.
So, what does the law say about all this?
Honestly, it’s not clear.
That’s where SEBI, the group in charge of keeping an eye on the stock market, comes in. But even they’re trying to figure out the extent of the craziness that is the Indian Options Trading Market!
This article will try to explain things better. This article is for you If:
- You’re someone who follows traders online, or
- If you’re thinking of sharing your own tips, or
- If the fin-fluencer you follow has now become an RA.
We’ll look at what SEBI says and what it means to be a “research analyst” online.
Let’s make things clear.
What are the SEBI rules I MUST know as an online trader?
To get a clearer picture, let’s dive into the official SEBI document and break down the regulations.
What is SEBI’s role?
SEBI’s main goal is to keep investors safe. Here’s how they aim to do this:
- Protection from Fraud: SEBI wants to make sure that innocent people don’t get tricked by bad advice.
- Verification: Before anyone can sell investment products, like mutual funds, fixed deposits, or stocks, they must register with SEBI. This rule doesn’t apply to real estate, though.
What are the key terms you need to know to understand SEBI’s regulations?
Understanding SEBI’s rules means knowing some key terms. Let’s explain a few:
- Independent Research Analyst (IRA): This is someone whose only job is to study the market and make reports. But SEBI doesn’t clearly say what counts as ‘studying the market.’
- Research Report: Basically, any piece of writing, or even a tweet or post, that gives an opinion to help people decide where to invest. For example, if someone says, “This looks like a good buy,” that’s a research report. But, some things don’t count as research reports. Here are a few:
- Talking about general market trends.
- Discussing major stock market indexes like Nifty.
- Sharing thoughts on the economy, politics, or general market conditions.
- Technical talks, like discussing the average performance of bank stocks.
Here’s a question: Can someone say, “The market looks strong, so buy any NIFTY ETF.” This is allowed.
- “The market looks strong, so buy NIFTYBEES at 199.22” – this is a research report since its forming the basis for investment decision
- The market looks strong, so buy any NIFTY call – grey area, but looks ok
- The market looks strong so buy the front week NIFTY 19050 call – research report
- Research Analyst (RA): This person’s main job is to make research reports and give advice on buying or selling stocks. They don’t need an official title to be considered a research analyst by SEBI.
There’s a difference between an IRA and an RA. For IRAs, research is their ONLY job. SEBI decides if someone is just an RA or if research is their only job, making them an IRA.
Doing Research Without SEBI’s Okay
Can you give stock advice without SEBI’s approval? The short answer: No. You have to be registered with SEBI to do that.
How to Become Registered with SEBI?
- The Form: Start by filling out a special SEBI form (termed as Form A). This form wants to know about you and why you want to give stock advice.
- Requirements: There are certain things you need to show. Like if you have the right education or experience in the markets.
- Getting Help: Don’t worry if this sounds tricky. There are easy-to-follow guides online that can help you out. For a deep dive, SEBI also has its own guide which is super useful.
What if Someone Tricks You?
Telling SEBI: If someone who’s not SEBI-approved tricks you, let SEBI know. If someone who’s SEBI-approved tricks you, let SEBI know. They want to hear about it. But they get many complaints. So, they might check on bigger issues first. They see:
- How much money people lost because of this person.
- How many people this person tricked.
- Is this person registered with SEBI?
How does SEBI act on complaints?
SEBI’s job is huge. They can’t watch everyone, every second. So, they act when people tell them about rule breakers. If someone’s breaking the rules, and SEBI hears about it, they’ll step in.
How Do Research Analysts Make Money?
Working for a Big Company: If a Research Analyst works for a company, they get a regular paycheck. If they help the company earn more, they might get extra. But there’s a catch: they can’t get extra money just because they bring in more trades. i.e, they cannot make money via brokerage/affiliate brokerage, as there would be a conflict of interest arising here. They could potentially have a motive to promote overtrading for the sake of their own monetary benefit.
Going Solo: For those who work by themselves, they have to be super careful. If they’re writing about a company, they shouldn’t have taken money from that company in the last 12 months. This is to make sure they’re giving honest advice.
Rules for Research Analysts (Both Approved and Not)
1. Show Your Trades: If you’re a research analyst, every trade you make needs oversight. This means every time you want to buy or sell a stock, your boss or supervisor needs to know about it to make sure there’s no conflict of interest. Think of it as a teacher checking your homework; it keeps things transparent.
2. Be Honest: Research analysts have an obligation to maintain integrity. If you’ve publicly recommended a stock saying, “This looks promising,” you shouldn’t trade against that advice behind closed doors. This is to ensure you’re not misleading people for personal gain. This is also true for trades the RA has taken in the derivatives segment.
Example: If an analyst suggests on TV that a Reliance stock is a good buy, they can’t sell their own shares of reliance the next day. It would be a dishonest move. It is also called a pump and dump.
3. The 30-5 Rule: After taking any trade, a research analyst should wait for 30 days before publicly commenting on it. Furthermore, after discussing it, they should wait for another 5 days before selling. This delay ensures that analysts don’t just hype a stock for quick profits. You can’t take the same trade 30 days before and 5 days after you’ve made a recommendation. There is no distinction here between stock and derivative trades!
Exceptions: The 30-5 rule isn’t absolute. There are situations where it can be sidestepped:
- A sudden change in the stock market, like a major economic event. For example, a crash triggered by macro news inflow such as perhaps, wars.
- Unexpected news from the company you’ve invested in, such as a merger.
- Personal emergencies that require urgent financial attention.
To bypass this rule, the reasons must be well-documented. For instance, if you’re applying to SEBI, you might need to include this documentation. Consulting a lawyer in these situations is a smart move to ensure you’re on the right track.
What’s the future of finance influencers in India?
With more people eager to trade and invest, the demand for reliable information is skyrocketing. SEBI’s regulations aim to ensure that these analysts operate transparently and ethically, building a trustworthy environment for investors. The ball is in SEBI’s court to come up with newer or updated regulations that can capture today’s trading environment accurately.
What you should take away from these regulations
If you’re an amateur retail investor or trader, diving into the world of stocks, derivatives and trading can seem daunting, especially with the vast array of information available online. Here are some essential steps to ensure you’re consuming content safely:
1. Be Cautious with “Calls” and “Targets”: If someone online provides a specific stock “call” (like a buy or sell recommendation) or sets a profit “target” for a particular stock, proceed with caution. Such actions may indicate they are functioning as an unregistered Research Analyst (RA) and if they’re asking for a profit share, then they’re in violation.
2. Verify Credentials: If you’re new to the trading and investment world or an ‘Aam retail trader’ (common man), always ask the person giving advice if they are SEBI approved as an RA. Being SEBI-approved means they meet certain criteria and follow specific guidelines, ensuring a level of trustworthiness.
Example: Before following a tip from a financial influencer on YouTube, drop them a comment or message asking about their SEBI RA status.
3. Check Influencers: If you regularly follow financial influencers or experts on platforms like Twitter, YouTube, or blogs, it’s wise to check their credentials. Ask if they are registered RAs and if they are permitted to share the type of advice they are providing. Even if they are registered RAs, you can ask for even more transparency here – you can even ask for their personal trades in the trading instruments they’ve recommended.
Conclusion: If you’re getting tips online or via the phone/SMS, double check
We can find many people giving financial advice on the internet. This is good because we can learn a lot. But, we also need to be careful. Some people might not give genuine advice or might try to trick us. Before listening to someone, always check if they are approved by SEBI. You can check it here –
https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=14
