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Keeping an Eye On Your Broker

When you use a broker to control all of some aspect of your finances, you are putting some level of trust in them. In some instances this trust is misguided and you can find yourself financially stung from doing so. Understanding the warning signs from your broker and paying attention to their reputation are essential prerequisites to using a broker.

What Fraudulent Activities can a Broker Be Involved In?

An broker can engage in many different fraudulent practices. A common example is a ponzi scheme in which an investment broker pays out an current investor with the proceeds from an new investor, pretending that it is a return on their investment. Another instance of fraud is when an investment broker acts through an undisclosed conflict of interest potentially by investing your money into a stock in a company they have an separate interest in. Alternatively, an investment broker may commit fraud by not investing the money that you deposit with them and using these funds for alternative things such as their own personal living expenses or in a manner that you didn’t agree to.

Pay Attention to Their Reputation and Investment Temperament

In all areas where trust is important, pay attention to a broker’s reputation. Consider what this Reputation means for your financial plan. Obviously if a broker’s reputation that has allegations of fraud you should steer clear of them. Choose a broker who comes from a reputable firm and seek one that has good reviews and ratings from investment agencies.

However if there is also a sign that your broker is particularly aggressive or risky in their investment choices it is also a sign or consideration that you should reconsider the amount of funds you have them handle. Risky investors may lead you into taking a significant loss in your account. Some brokers may find themselves behind the average return and may feel pressure to catch up partly through illicit means. This was the start of many different ponzi schemes in the past. Some investment brokers fell behind early and used the money from new investors to pay for the losses on earlier investors.

To understand their investment strategy you should ask brokers you are considering some questions about how they see investments and what their investment horizon is. Make sure that their interests and return is in line with yours.

A good reputation and investment temperament should help to weed out some of these investors.

Signs Something is Wrong With A Broker

There are numerous signs that your investment broker may have something wrong with them. Some signs that something is wrong with your broker include them having direct control of your funds. A good quality broker will deposit your money at a custodian and be able to direct investments on your behalf without having the ability to extract your funds. Brokers who don’t use a third party custodian to hold your money is a sign that your broker may be dishonest. In addition, your investment statements should come directly from the custodian and not from your investment broker.

Consistent and high returns for a prolonged period may be a sign that something is not right. While it is certainly good to have a good return on your investments, consistently high returns may be a sign of a ponzi scheme and should be a sign that you should investigate your investment broker more fully.

An investment broker being unwilling to explain strategies or converse on an uncomplicated level with you can be a sign that something is not right in your account. Investment brokers should be able to simplify your investments in a way that a layman would understand and not being able to explain your investments to you may be a sign that they are not acting in your best interests.

Finally, investment brokers that don’t have audits done if they are running a fund or do not have professional financial statements or support for investments that they are making in private funds may indicate that they are acting fraudulently. If your investment broker is using your money to invest in entities that are privately owned (not a publicly traded company) they should have support for the company that they are investing in. Not having this support may be a support that the investment broker may have a conflict of interest.

It is important to look into your investment broker’s history and reputation and to keep an eye on your broker regularly. Doing so can help you to safeguard your investments and protect yourself from financial loss due to fraud.

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