What is Dabba Trading?
5paisa Research Team
Last Updated: 27 Sep, 2024 04:23 PM IST
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Content
- Dabba Trading
- How Does Dabba Trading Work?
- Why Investors Get into Dabba Trading?
- What are the Dabba Trading Attributes?
- Risks of Dabba Trading
- Legal Trading Vs Dabba Trading
- What are the Consequences of Dabba Trading?
- Conclusion
Across decades, investors have been drawn to the stock market by its allure of affluence and opportunities for financial growth. Numerous strategies and approaches have emerged as the financial scene has changed, each offering unique paths to navigate the always shifting and unstable markets.
Among these tactics, investors have recently become interested in dabba trading, also known as bucket shop trading.
This unusual and unregulated kind of stock trading operates outside of traditional exchanges and offers a compelling option for those seeking out other means of obtaining financial success.
Dabba Trading
Dabba trading is mostly employed in Indian contexts; it is sometimes referred to as bucketing or parallel trade. Dabba trading meaning, word "Dabba" means "box" in Hindi, alluding to the clandestine and uncontrolled character of this type of business. Dabba trading entails making deals in financial items without registering them on any official exchange or regulatory platform, such as stocks, commodities, or currencies.
Dabba Trading is essentially a kind of gambling where the focus is on stock price prediction. Here is how it operates:
Let us consider an investor who is willing to take ₹ 2,000 on the ABC stock. The investor makes a profit of ₹ 1000 if the stock price increases to ₹ 3,000. On the other hand, if the stock price drops, the investor is responsible for paying the difference to the dabba broker.
How Does Dabba Trading Work?
In India, the dabba method is also known as box trading, whereas in the US market, it is known as bucket trading. Investors are directed by the broker to make outside stock market investments. Every week, all transactions are completed in cash, and orders are issued through operators. After receiving the order from its customer, the operator records the deal in its records. To enable transactions, the operator charges its clients’ money.
The danger of trading in the bucketing market is larger. Being an unlawful transaction, it carries counterparty risks and measures taken by the relevant authorities. Since there is no settlement guarantee in place for the Dabba system, you run the risk of losing all of your money.
In India, the parallel market is frequently used to sell copper, crude oil, gold, and silver.
Under rules 3 and 4 of SEBI Prohibition of Fraudulent and Unfair Trade Practices, SEBI outlawed dabba trading as an unlawful and forbidden practice. The Information Technology Act of 2000 and the Indian Penal Code both provide penalties for it.
Why Investors Get into Dabba Trading?
Avoiding taxes is this practice's main allure.
You must pay various fees and taxes, such as the Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT), when you invest through authorized stock exchanges. With dabba trading, all of these taxes are avoided. Additionally, because cash transactions can place without any documentation, this practice may contribute to the rise of "black money," which might be utilized for other illegal purposes.
What are the Dabba Trading Attributes?
The major features of dabba trading are as follows:
1. No Regulation: The laws and guidelines governing stock exchanges do not apply to dabba trading since it takes place outside of the formal stock market.
2. Ignorance of taxes: The primary allure of dabba trading is its capacity to evade taxes such as the Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT).
3. Minimizes Trading Cost: Dabba Trading investors avoid paying a variety of costs that are commonly incurred during stock exchange transactions, including depository, brokerage, and stamp duty.
4.Unreported revenue: Since dabba trading transactions are frequently made in cash and off the record, unreported revenue may be generated. This unexplained money might be used by someone for illicit purposes.
5. Fast Trade Execution: Trades on the dabba market are carried out more swiftly since there are fewer traders and no regulatory oversight.
Risks of Dabba Trading
Engaging in Dabba trading entails considerable dangers for investors, such as:
1. Funds Loss: Dabba traders run the danger of losing their money because of dishonest pricing tactics and manipulation.
2. Legal Repercussions: Since Dabba trading contravenes financial rules in several jurisdictions, it may lead to fines, criminal prosecutions, and legal proceedings.
3. Lack of Recourse: Investors have little recourse in the case of disagreements or losses because Dabba trading takes place outside of established channels.
Legal Trading Vs Dabba Trading
Brokers execute orders on the stock market when investors make orders to purchase equities. Brokerage fees, exchange fees, SEBI turnover fees, taxes to the Income Tax Department, and Securities Transaction Tax (STT) are only a few of the costs associated with a transaction. The investor will pay Rs. 201 for a transaction worth Rs. 200.
Dabba trading eliminates the need for a real order to be put on the exchange by having the agent execute the deal outside of the market. At a certain price, the buyers place a wager on the scrip. The trader would profit from the difference between the listed price and the price if the share price increased. In a similar vein, the buyer will be responsible for any variation in price. With the dabba method, traders can transact without needing to have any money.
Dabba trading is essentially speculating on the volatility of stock prices. There are no transaction costs since there isn't a real transaction. You will profit if the price swings in your favor. You will cover the difference if not. These brokers facilitate online dabba trading, offering platforms that mimic official exchanges but without proper oversight or transparency. While online dabba trading might seem appealing due to lower fees and faster execution, it carries significant risks, including lack of investor protection and legal ramifications. Investors should be cautious when dealing with dabba trading brokers as this form of trading is illegal and can lead to severe financial and legal consequences.
What are the Consequences of Dabba Trading?
Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956 prohibits dabba trading.
In addition to violating securities laws, it also violates Indian Penal Code, 1870 Sections 406, 420, and 120-B. Investors and dealers may be fined up to ₹25 crore, get up to 10 years in jail, or both if found guilty.
Conclusion
All things considered, dabba trading is a concerning activity that jeopardizes investor safety and undermines the integrity of financial markets. It is imperative that investors and dealers avoid these kinds of activity and stick to reputable, regulated trading platforms.
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Frequently Asked Questions
Yes, Dabba Trading affects the Indian economy by promoting tax evasion, reducing government
revenue, and fostering a parallel economy. It also leads to market distortions and encourages illegal
financial activities. Their reliance on cash transactions also puts them outside the purview of the
current banking system.
Even though it could be profitable, you should avoid doing it. Dabba trading has inherent dangers because it is not
governed by any laws or regulations.
Dabba trading entails a significant risk of fraud, due tothe lack of official transaction records and the possibility of operators leaving under pressure from various government agencies.