09 Nov 2011

Broker Fraud and Class-Action Lawsuits

Broker fraud is the illegal act of deceiving an investor or violating his or her instructions in order to benefit the broker or the brokerage firm. Stockbrokers have a responsibility to act sensibly with clients’ money and to avoid unnecessary or unreasonable risk. When they fail to do so, they may not only be in violation of the law, but they may also be liable for any financial damages caused to the client.

If you suspect your broker of committing fraud and hurting your investments, consider consulting with a securities fraud class-action lawyer as soon as possible.

Types of Broker Fraud

This type of fraudulent activity can be found at all levels of investing. There are many ways that a broker may commit fraud, including:

  • Unauthorized trading: Acting without the client’s permission or violating his or her explicit instructions
  • Misrepresentation or omission: Misrepresenting or omitting facts regarding investments
  • Unsuitability: Making investment suggestions that are not suitable for an investor’s needs or accepted level of risk
  • Churning: Unnecessarily buying or selling stock to gain greater commission payments
  • Overconcentration: Overconcentrating an investor’s stock portfolio in a single stock or a few stocks

Any of these acts of fraud can cause significant damage to investors’ finances. Not only is this type of fraud a violation of the law, but it is also a violation of clients’ trust that can qualify as grounds for a class-action lawsuit. If you are an investor and suspect or have evidence of broker fraud, you may be entitled to recover compensation for your financial losses.

Knowing your broker intimately is very important for you as most of the time the broker might be trading against you without you ever realizing it. Forex is an over the counter unregulated market. This means that there is no central agency like that in the futures markets that can function as a clearing house.

What this means is that most of the time, forex brokers are free to quote currency rates of their own. Most of the retail forex brokers get rates from the interbank market and add 1-2 pips to the spread when quoting rates to their clients. Especially in times of high volatility, forex brokers can suddenly widen the spreads. The higher the spread, the more your trading cost.

All brokers tell their new clients that they charge no commission. This is portrayed as a plus point of forex trading as compared to stock trading where brokers usually charge commission per trader. What they don’t tell is that their commissions are hidden in the form of bid/ask spreads when they quote currency rates. You see the 2-5 bid/ask spread is your trading cost whereas it is the broker’s profits. Each time, you buy or sell a currency pair, you will pay this spread to the broker. The more you trade, the more the broker will make.

Brokers encourage their clients to trade more. There are many games that forex brokers use to make you trade more. A broker will invite you to take part in a trading competition with the announcement of something like $2000-$2500 as a prize for winning the competition. Most of the new traders lose 99% of the time. The more you lose, the more the broker makes. Now this has also got something to do with the nature of the retail forex market.

Retail forex market is different from the interbank market that is highly regulated. But as a retail trader, you don’t have access to the interbank market. Your only means to access that market is through the middleman in the form of your forex broker. Most of the retail trader have small account sizes. So when you open a trade, keeping in view the small size of the trade, the broker is forced to take an opposite position just to provide liquidity. This provides the forex broker to trade against you. Since, most of the new traders are inexperienced, they lose a lot. Your loss, your broker’s profit!

Add leverage to this. Your broker will entice you to use a high level of leverage by saying that it will increase your profits. You are new, you don’t know how to use leverage. You end up losing. The more you lose, the more your broker will make.

Your broker can easily turn your winning trade into a losing trade. Many traders keep on losing without knowing the fact that the broker is using sudden spikes in the price feed to periodically trigger your stop losses. This is also known as stop hunting. When a broker finds many stop orders close to a price level, they can generate a sudden spike or blip in the price feed to take out most of these stops. Most traders never find out that the spike was artificially generated by their broker.

If you have an independent price feed, you can compare the two price feeds. You will be astonished to find that there was a spike in the broker price feed whereas in the other price feed there was none. Forex brokers can play many games with their clients. They can make the excuse of slippage to suddenly widen the spread upto 10 pips when they quote rates to their clients. So before you start trading seriously with your hard earned money, know the shocking forex broker frauds!

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09 Nov 2011

Brokerage Firm FAQs

What is a brokerage firm? A brokerage firm is a company that has the required legal permissions to indulge in the trading of securities. It also provides analysis and advisory services to clients.

Who are employed in a brokerage firm?

A brokerage firm hires traders and research analysts to work for them. Traders are authorized to sell securities on behalf of the firm and its customers. Research analysts? research stocks track companies and provide advice on whether to buy, hold or sell a particular stock. Most brokerage firms are publicly traded companies that also trade securities for their own profits.

How does a brokerage firm make money?

A brokerage firm sells its knowledge and expertise of the securities markets to its clients. They charge fees for acting as an intermediately between the buyers and sellers of securities. They also make money through proprietary trading.

What are the different types of brokerage firms?

There are three main types of brokerage firms.

Full service brokerage firm offers advice on investment strategies, research and news. Since these firms offer multiple services, their fees are also higher.

Discount brokerage firm is ideal for someone who is an experienced trader who makes his or her own decisions. Discount brokerage firms have lower commission costs than full service brokerage firms.

An introducing brokerage firm is one that specializes in futures markets and buy or sell orders on commodities exchanges through established firms that are clearing members of exchanges.

What are the licenses that a broker from any brokerage firm needs to have?

The licensing and training requirement for futures brokers is different from that needed for licensed stockbrokers. A futures broker needs to have a Series 3 license, while a Series 7 license is essential for a stockbroker. There are many brokers that have dual license so that they can deal in both markets.

What are the factors to keep in mind before hiring a brokerage firm?

One must ensure that the brokerage firm they hire has all the right licenses for trading in stocks and bonds and have the necessary clearance certificates. Those that want to trade directly using the Internet also need to find out whether the systems at the brokerage firms comply with current standards. One needs to be sure of the costs and fees, including any hidden costs of dealing with the particular brokerage firm. One also needs to find out the minimum account size that the firm accepts, the performance bond requirements, the handling of dispute orders and the track record of the firm.

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09 Nov 2011

Forex Trading – Forex Broker Frauds

Wherever there is money around, you find scams around it. If you are a trader in Forex market, this is not new for you. But if you are new to Forex trading then this is something you should know and be aware of.

You need a broker for trading in any financial market. Forex market is not regulated. So you need to be extra careful while choosing a broker.

You can follow the below points while choosing a broker.

1. Avoid brokers that belong to third world countries and those who don’t even state where they are based.

2. I am hearing a lot of broker scams these days. Get all the details of the broker you want to choose. Strictly avoid them who do not give their full details including address and phone number.

3. The forex broker you choose can not trade against you. There are lot of brokers out there doing this. Be aware of this situation.

4. Do good research and read reviews on the broker you want to choose.

5. Observe what other traders think about him, his executions,and even inquire about the customer support he is offering. Visit his website and find out his details.

Remember that if the broker is allowing you to trade for just $100, then he might want you to have a big leverage. Using big leverage out of small amount is not a good idea.

You can get ripped off with a loss. You might lose your entire amount.

So go ahead and do deeper research to find good and solid forex brokers.

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09 Nov 2011

Stock Traders – Here Are 19 Questions to Ask Yourself Before You Select a Stock Broker

If you are thinking about trading stocks and need to find a stock broker or are looking for a new stock broker there are a number of questions you should be asking yourself as well as your target stock broker, before you sign on the dotted line. While many stock traders just sign up with a stock broker because they offer low commissions or have a familiar name, choosing a stock broker that matches your trading style and account size can be the difference between making and loosing money in the stock market.

Before you start to look for a stock broker you should ask yourself a number of questions and try to identify your trading game plan. Here are some questions you can ask yourself to help you find the best online stockbroker.

1. How much of a commission charge can I live with?

The price for a single transaction through an online discount broker can vary from as low as $1.00 per 100 shares to approximately $30 per 1,000 shares. Full service brokers may charge from 1 to 2% of your trade or they may offer you a yearly rate. Not only do you need to factor in these charges as a cost of doing business but you have to be able to accept them such that they do not interfere with your trading.

2. How many trades per month do I expect to place?

Some brokerage firms charge an extra fee if you do not place a minimum number of trades per month. If these types of fees bother you, you should likely look for another broker.

3. Am I more likely to buy over the counter, penny or blue chip stocks?

First, not all brokers will allow you to trade over the counter stocks so if this is what you want to do your brokerage choices may be limited. Also, if you are thinking a full service broker is what you need, make sure their trading experience matches what you want to do.

4. What type of orders will I use to purchase my shares: market, limit or on stop?

Make sure the broker you choose allows you to buy and sell the way you want to buy and sell. Most brokers should offer all three methods of placing an order.

5. Will I need to enter good until closed orders?

Some brokers allow you to place an indefinite good until closed order and others limit the time that you can keep such an order open. For instance, you may choose to place a sell stop to limit your losses in case the market goes against you. If the broker removes your stop after a specific date and you forget to put it back in you could face an unexpected loss.

6. Do I want the option of phoning an order in?

If you want the option of phoning in an order check this out before you choose your broker. Some online stock brokers only do business through the internet unless there is an emergency and you need to sell your open orders.

7. What type of accounts (registered, cash, margin) will I be opening?

The type of account you want to open is important as some brokers will not handle registered plans.

8. Will I be selling options against my stocks?

If you want to do simple options strategies like covered calls make sure your account is set up for this.

9. What is the minimum return I need to break even?

If you complete one trade a week and pay $10 to buy and $10 to sell then after one year you will spend $1,040 on commissions or 10.4% of a $10,000 account. By viewing commissions in this fashion you can get a better idea of either how large a trading account you need, the number of trades you should do in a year or how important it is to ensure you are paying the least amount of commissions possible.

10. Will I be using bracket orders?

A bracket order allows you to place both a limit order and a sell stop at the same time. This is done to always have a profit target active in the market at the same time you have a sell stop in to either lock in profits or limit losses. Once one is hit, the other is immediately canceled. Some brokerage houses will not do these types of orders.

11. Do I want to do everything myself or do I want to talk to someone prior to placing an order?

If you want to do it all yourself then a discount broker is likely where you want to look. However, if you want to talk to someone about every trade then you should be looking at a full service broker.

12. What time frame will I be trading?

If you are thinking about day trading then do not consider a full service broker. On the other hand if you think you will be investing in stocks (long term strategy) instead of trading (short term strategy) then, a full service broker may be what you need.

13. Which markets will I be trading?

Make sure the broker you sign up with trades the markets you want to trade.

14. What is my trading style?

If you are using a discount broker, trading style likely does not matter but if you choose a full service broker it will matter. Make sure your trading style and your brokers align to save you a lot of frustration.

15. How many shares will I generally be buying?

Some brokers charge per 100 shares while others charge the same amount whether you buy 100 or 1000. Therefore, try to match your buying style to the commission schedule.

16. Do you want to receive a statement in the mail or will an email do?

While many full service brokers send you a monthly account statement in the mail and may also mail you copies of each transaction, online discount stock brokers may not do this. If this is important to you, ask before you sign up.

17. How much money will I be depositing?

If you are opening an account with a small amount of money make sure your broker allows it. Most brokers have a minimum requirement to open an account. If you are starting with less than $10,000 be extremely cautious. While there are likely people who have grown a $10,000 account there are likely many more that have lost it.

18. How fast do you want to get filled?

Although most brokers today get filled quite quickly some are still faster at completing a trade than others. If you generally place market orders, your order will likely be filled quite quickly. However, if you buy on stop, some firms have a number of processes in place that slow the order down potentially resulting in missed opportunities or higher fill prices.

19. What extras are you looking for?

There are a number of extra services that stock brokers offer. These may include: real time stock charts, stock market screeners, research reports, option calculators, newsletters and the like. These extra services may make the difference between your final selections.

By asking yourself these questions before you approach a stock broker you will have a much better understanding of what you need from them and be better able to identify if the broker you are looking at will help or hinder your trading.

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09 Nov 2011

Understanding the Types of Stock Fraud

We all know that stock fraud, also known as securities fraud, deals with deceiving people for money, but there are actually numerous types of stock fraud, all just as equally bad as the next. Bernie Madoff, Martha Stewart, and the fine folks over at Enron are all serving (or served) time for different charges of stock fraud. There are so many forms but we’ll just talk about the ones you tend to hear about on the news all the time.

You can thank Enron for making corporate fraud popular in the 2000s. Corporate fraud is simply any type of fraud committed by large corporations and their high level executives. Corporate fraud is complex and has a large negative effect on employees, entire communities, investors, lenders, and financial markets.

With the age of the Internet comes computer and Internet crimes. Internet fraud refers to the use of the Internet to conduct fraudulent business in schemes. This can occur in chat rooms, on websites, or through e-mail. The amount of schemes done over the Internet are practically innumerable. Some examples include the selling of nonexistent items, phishing, work-at-home scams, and investment schemes.

Insider trading has been going on way before Martha Stewart or the movie Wall Street. This is when an “insider” or informant in the company gives someone non-public information and trades stock based on that information. There is a legal form of insider trading which is when a person who works for a company buys and sells stock within the company.

Accounting fraud is when a company lies about its revenue or misdirects funds. Many companies will make it seem that they are worth much more than they really are. Accounting fraud has been nicknamed “creative accounting” because the company learns how to hide or misrepresent their earnings — think of Broadway show The Producers.

Microcap stock fraud relates to small businesses, those with a market capitalization under $250 million. Stocks are sold fraudulently to the public through any number of different stock fraud schemes, such as pump and dump schemes, chop stocks, and dump and dilute schemes.

Unfortunately, a growth in the United States’ markets has also led to an increase in stock fraud. Securities fraud is also becoming more complex as these criminals think of new scams and schemes. The Internet has also led to a huge surge in fraud since it is so much easier to find potential victims. It is often hard to recover the money gained from fraud because criminals have become quite good at hiding the money.

As technology continues to grow, I’m sure these white collar crimes will too. New scams will surface and more will become the innocent victim in these greedy crimes.

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