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The internet has connected people around the globe. Unfortunately, most people do not understand how to decipher the intentions of a broker. Some brokers may not reveal their intentions since they are after your money. And when you intend to make money, make sure you don’t fall for a broker scam.
With ever-increasing global crises, the world is still recovering from the pandemic and loss of jobs. Above all, ever-increasing inflation has caused havoc in everyone’s lives. As a result, people worldwide are looking for an alternative source of income. With the loss of jobs, many have turned to the stock market to make quick money.
Since many have now started taking a keen interest in the stock market, some have fallen victim to broker scams. It becomes quite clear why you need to understand and avoid these scams. We aim to educate you. After you have finished reading this post, you will have enough awareness to spot a scam.
The Broker
The entire drama starts with the selection of a broker. Not all brokers have ill intentions; some are genuine and want to make an honest trade. So who is a broker? A broker is an individual or a firm who conducts trade in the stock market on your behalf. For example, if you order to buy 100 stocks of Microsoft company, the broker buys it for you. And when you call to sell, the broker sells it for you.
There is one more financial instrument prevalent amongst the brokers: CFD or Contract for Difference. This instrument allows you to place a bet on the asset’s price trend without having to own the asset. There are only two possibilities, either the price trend will go up or down.
CFDs are not traded on the exchange but through OTC (Over the Counter). So the trade is conducted directly between you and the broker. CFD brokers earn money through various means; the most common is the commission and spreads when the client incurs a loss.
So making money is not bad, and a CFD broker bets on the chances that many traders lose their profit while these brokers make a living.
And so the Scam Begins
Over the period, many brokers have realized that more money can be made by making their client the proverbial “sacrificial goat.”
There are two traits that can identify brokers who genuinely want to conduct their business. First, they do not call up their client until and unless there is a security issue, document, etc. Secondly, they will have a sales representative encouraging you to invest more in the market and providing you with the market updates. However, they avoid providing you with any advice on specific stocks.
Now for the nefarious brokers. Your first contact would be the sales team, whether you approach them or they approach you. They only have your money on their mind. They will entice you and provide you with wrong advice compelling you to deposit more and more money into your account.
These sales representatives are only interested in the commission they get by the amount of money you pour into your trading account.
Now enter the portfolio managers. They will claim that they will be handling your investment portfolio. First, they will build up a rapport with you. Initially, they will give you the correct advice, and once your funds build up, they will start giving you wrong advice so that you end up with a loss. Finally, they will drain you out of your funds, leaving you helpless.
How do they accomplish it?
It’s quite simple. The sales representative will give you false hope and will end up siphoning up as much funds from your pocket as possible. These guys earn commission from the amount of money you deposit.
Then comes the portfolio managers, who will sugarcoat their words and further inflate the optimistic seed planted by the sales representative. And then, these fund managers will start playing with you until they have sufficiently reached the target set for you. They will still encourage you to pour more money into your accounts. Once your funds hit that target, it is only downhill from there.
These traders do not apply stop-loss while trading on your portfolio. In the end, they will make sure to reap all the fruits of the seeds sown by you in terms of your funds (all your investment grown till now.)
The traders have one more card up their sleeves. They will advise you to invest more and keep the position open by giving you the false hope of becoming a millionaire in just one trade. And here is where you will be compelled to sell off your car, house, or anything of a value that can be pawned off or kept as collateral against a loan.
Thus the trader makes sure that you lose everything, and they get a fat bonus. It is hard to say what kind of psychological trauma these victims go through due to some nefarious actors carving up their victims like a turkey.
Identifying scammers
Now that we have understood the modus operandi let us know how to spot them.
Most of these scams take place in binary options brokers. Many, if not most, of the CFD brokers are unregulated. Ask for their license number and run it across the regulatory authority’s site to verify their authenticity. This number authenticates the country of origin, and the regulatory authority that issued the license. Many would have an expired license. Avoid them at all costs. They may have expired for genuine reasons or had their license revoked due to mischievous or unknown causes. Instead, approach those who have a valid license. There are the ones who are genuine as their reputation is at stake.
Here are a few tell-tale signs that you are dealing with a potential fraudulent broker.
Act-I
It all begins when the sales team initiates the call. They would usually start by trying to convince you that trading can change your life, adding up to your secondary source of income. If you happen to make an excuse saying this isn’t the right time to call or you are busy, they will make sure that you don’t end the call and keep pushing you more and more. They will even try to entice you by assuring you that they will help you attain your financial goals. They may appear rude and stress on the famous line “once in a lifetime opportunity.”
Act-II
Now comes the portfolio manager, who will advise you to avoid using the stop-loss feature (a feature that assures you to stop you from incurring more loss if you have entered into a losing position) as it inhibits you from making some real money.
They would also encourage you to invest more or open up a bigger trade to make a huge profit. The more volatile the market, the quicker you dream of becoming a millionaire. Consider trading in assets like gold, oil, and gas to assure you the best returns. They will advocate for you, focusing on small profits to help you reach your financial goals.
Act_III
Brokers make their entry. They don’t warn you about the risk involved on their websites. They fake their location, which is questionable, such as being located on a small island.
And the final cherry on the cake is that they forget to mention you cannot withdraw your money from your account. And in case you try to withdraw your money, they stop answering your calls. It means, you can kiss your money goodbye.
These brokers will keep their name unchanged for a period before changing their name again, so the drama continues by victimizing another innocent investor.
Conclusion
Trading is not a bad thing if you take a holistic view. Several investors trade globally, and many more join their ranks daily. Now that you are well versed with the broker scams, you can be rest assured that your trading journey will be fantastic.
Taking ownership of your trade will help you get along for a long time.
- Practice on a demo account. Many brokers offer such services.
- Understand the market condition and stray abreast with the latest global financial news.
- If you make a loss, you are to be blamed—research why the failure occurred. And make sure the same does not happen in the future.
- If you make a profit, then you take some positive steps. Research on what went right and try to replicate those moves again so that you make a profit again.
- Never give in to negative emotions like fear and greed. Try to remain calm during the trading sessions.
- Use stop-loss to minimize the potential risk.
- When you make a loss, take a break and discontinue trading for that day.