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Brokers Fraud: Different Types and How to Avoid Them

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George Thomas
Brokers Fraud: Different Types and How to Avoid Them

Have you been the victim of misconduct or Brokers Fraud? 

Most traders lack the knowledge and expertise required to detect brokers fraud or misconduct by the brokerage firm. There are various things which one can carry out if he/she doubts brokers fraud, and also there are multiple resources which help to turn to for legal representation or answers. 

With the plunge or fall in the investment portfolio valuation, investors often come across the suspicion of whether their online trading portal or brokerage company has given them valid advice or not. 

Misconduct from the broker side cannot always be prevented. Still, there are certain things that traders can do to mitigate the chance of significant investment losses because of unethical broker behaviour or fraud. 

Most common types of brokers frauds 

Some common types of brokers frauds which traders generally face are listed below: 

Outright Theft or Conversion of Funds

One of the most blatant and worst types of brokers fraud is outright theft. In this type of brokers fraud, the broker will make use of their privileged position to intentionally misappropriate or steal the funds indirectly or directly from the sufferer trading account. It can happen in various ways; generally, brokers use tricky tactics to hide their scam. It is observed that generally disabled and elderly traders are at large risk of falling into this trap. It is because many of them do not understand their account statements. 

Unauthorised Trading

The broker requires your permission before they can carry a transaction on your account. As an obvious rule, this permission can come in two ways. 

  • First, you might have signed for a discretionary trading account. It is a type of account sign as an agreement that provides your broker proceed with particular types of trade on your account, without any requirement for your permission for each such transaction. 
  • Second, you might have opened a non-discretionary brokerage account. It is a type of account for which your broker is legally bound or forbidden for carrying any transaction without your permission for the particular trade. 

Misrepresentation or Omission of Material Facts

 It is the legal and personal duty of your broker to provide an honest evaluation of any proposed transactions. Beyond the ban on outright lying, other types of false tricks are also regarded as fraud. You have full right to decide if your broker omits any crucial facts or misleads any trading or investment opportunity. 

Lack of Diversification

It is one of the famous sayings in the world of investing: One must never keep all his eggs in a single basket. As per the saying, in the case of investment in securities, one requires a larger number of distinct sacks or baskets. An impressive and managed portfolio is the structure which allows the trader to receive the best possible opportunity for a decent profit or return at the same time trying to keep your risk low and at a satisfactory level. 

A broker has to help his customer in maintaining a well-diversified portfolio that mitigates his risk and exposure. If someone loses his money due to over-concentrated of its funds by a broker, he should immediately look for the legal profession. 

Unsuitable Investment Recommendations

It is the professional responsibility of your broker to examine and carefully conduct an assessment of the trader’s individual situation. It is essential because investment opportunities vary for different types of traders. In addition to this, he must construct the compressive risk report of all securities which fit nicely in a trader’s profile. 

Suppose your broker forces you into an inappropriate investment, whether it is because the trade is too complicated or too risky. In that case, an individual has a legal right to take full compensation for any losses. 

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George Thomas
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