Dabba Trading Definition
The stock market has gained popularity over the years. Historically it has generated more returns than any other investors, driving more investors to invest in equities to reap benefits. However, sometimes investors take a different route of investing in stocks. The Dabba system in India is a parallel system that allows investors to buy and sell stocks outside the stock exchanges. When we say it’s a parallel system, it means dabba trading is illegal.
Let’s understand dabba trading meaning in detail to understand why it is risky to trade in an unauthorized market.
What is dabba trading?
Dabba trading is a proxy market. Investors must open a Demat account with a broker to buy and sell stocks on the stock exchange. But in bucket trading, all translations happen outside of the market guidelines. It is risky but profitable since there are no governing rules and regulations. All trades in the dabba system are settled in cash. The operators in the system take orders personally and book the transactions outside the stock market.
Since it is illegal, there is no income tax on profit. Traders also don’t pay Commodity Transaction Tax (CTT) or Securities Transaction tax (STT) on their transactions. SEBI has taken several steps to curb the dabba trading system and encourage more investors to invest through the mainstream.
How does dabba trading work?
The dabba system is also called box trading in India and bucket trading in the US market. The broker routes the investors to invest outside the stock market. The orders are placed through operators and all transactions are settled in cash every week. The operator books the trade in its record after receiving the order from its client. The operator charges money from its clients to facilitate trades.
Transacting in the bucketing market carries higher risk. It involves counterparty risks and actions conducted by respective authorities since it is an illegal transaction. The Dabba system is a pseudo-market without a settlement guarantee, meaning you may lose all your investments.
In India, gold and silver are often traded in the parallel market, along with copper and crude oil.
SEBI banned dabba trading as an illegal and prohibited activity under regulations 3 and 4 of SEBI Prohibition of Fraudulent and Unfair Trade Practices. It is also punishable under the Indian Penal Code and the Information Technology Act of 2000.
Difference between legal trading and dabba trading
When an investor places an order to buy stocks, the broker executes the order on the stock market. The transaction incurs some expenses, like brokerage fees, exchange fees, SEBI turnover fees, and taxes paid to the Income Tax Department and Securities Transaction Tax(STT). An Rs. 100 transaction will cost Rs. 101 to the investor.
On dabba trading, the agent will execute the trade outside the market, and no actual order is placed on the exchange. The buyers bet on the scrip at a price point. If the share price rises, the trader would gain the difference between the quoted price and the difference. Similarly when price falls, the customer will have to pay the difference. Traders don’t need to have the money to transact in the dabba system.
In a nutshell, dabba trading is betting on the stock price movement. Since there is no actual transaction, it doesn’t incur any transaction cost. If the price moves in your favour, you will gain. Otherwise, you will pay for the difference.
Despite all efforts from the market regulator, dabba trading is rising. It is a method to change black money into white. Most of the time, investors willingly participate in illegal trades. Sometimes, the brokers may engage in pseudo-trading without the knowledge of the client.
The broker will make one transaction of a single share to fix the price point when the real deal contains ten or thousand shares. Once that is done, the trade gets squared off on the said date. The trades are purely based on trust.
Dabba trading software
Dabba trading software is a real thing. It has reached a level where traders use software specially made to carry out trades outside the stock market. Although SEBI is tightening its measures to curb unauthorised trading, there is a rise in the volume of Dabba trading. Dabba trading software and apps are reaching the audience, allowing them to transact with simple clicks. These applications are linked to the stock and commodity market to track live price changes.
Risks to dabba or box trading
Dabba trading carries higher risks since it is not regulated. There is no guarantee of getting a settlement. Profit from a dabba trade depends on the loss of another party. Those operating in the dabba market aren’t members of the stock exchange. The operators place large orders in the stock market and bear the loss or profit from the deal, which makes box trading a vulnerable investment option.
Dabba trading impacts the whole economy. It encourages tax evasion where lakhs and crores are betted outside the legal system. It deprives the government of thousands of crores in revenue.
Secondly, it is akin to organised gambling which is illegal in India. Traders trade without the safety net provided by the exchange or SEBI. Sometimes, traders will place large orders of crores without having adequate money in reserve. So, even if you win the bet, you may fail to retrieve the money from the losing broker or investor. Hence, your money is always in danger as there is no exchange guarantee or margin safety.
The bottom line
Dabba trading is risky and illegal. Hence, most investors avoid the route. One can invest in stocks by opening a Demat account. Nowadays, it takes only a few minutes to open your Demat account with a registered broker. You can invest safely and honestly through a reputed broker.