There are many reputable brokers to chose from if you are interested in trading online, but there are unfortunately also fraudsters who pose as brokers to lure in victims. Some of them acutally provide a brokerage service but with disreputable practises, while others are only quickie scams where the intention is to harvest a bunch of first deposts and private information from people and then vanish.
Below, we will share a few points that are good to keep in mind when selecting a broker for online trading. There are never any guarantees, but by being well informed and doing your diligence, you can reduce the risk of falling victim to a broker scam online.
If you encounter something that you find suspicious, you can report it to the relevant financial authority or to the police.
Regulation
It is generally best to pick a broker that is regulated where you live and trade, as this puts you in a better legal situation. This means that a trader in the UK will pick a broker regulated by the FCA, a trader in Australia will use an ASIC regulated broker, a trader in the European Union will select a broker that is based and regulated in one of the membership countries, and so on.
In some cases, this may note be a feasable route. You may be living in a country where there is no proper authority in place that actually regulates, authorizes and oversees online brokers. Or, you live in a country where the financual authority in charge is known to be lax and not really provide much in the way of trader protection. In these situations, many brokers will instead pick a broker that is active internationally and licensed by a reputable financial authority that is known to be strict when it comes to trader protection. This solution is not ideal, but may be the “least bad” one in certain situations.
When you have found a broker you are interested in using, always check with the applicable financual authority to find out if this broker is actually licensed by them and if the license is up to date. It is very easy for a scam broker to claim to be licensed by a reputable authority.
Special considerations regarding binary options
If you are a hobby trader who wishes to use binary options, finding a broker regulated by a strict authority will not be easy, because most of the top-tier authorities have banned brokers from offering, selling and marketing binary options to non-professional traders. This means that the brokers that are still offering binary options to non-professional traders (retail traders) tend to be located in lax jurisdictions. This will, of course, increase the risk of ending up with a fraudulent broker. For the non-professional traders, it is best to stay away from binary options all toghether. You can for instance look for reputable brokers that offer Contracts for Difference (CFDs) instead, since these derivatives have certain similarities with binary options.
Binary options are still legal in the United States, but only if they are traded on a regulated U.S. exchange in accordance with the requirements set by the Commodity Futures Trading Commission (CFTC). At the time of writing, only three exchanges in the U.S. have the necessary designation (Designated Contract Market /DCM) to list binary options.
- Cantor Exchange, LP
- Chicago Mercantile Exchange, Inc. (CME)
- The North American Derivatives Exchange, Inc. (NADEX).
There are scam brokers online that will highlight the fact that binary options are legal in the United States, while conveniently not mentioning the exchange requirement.
Be suspicious of unrealistic promises
If something seems too good to be true, it usually is.
Be very suspicious of trading opportunities that are marketed as low-risk, low-effort and high reward. It is easy for anyone online to promise you immense profits, because if you lose money, they will simply refuse to honor that promise.
Ignore the cold-callers
If you want to trade online, do your own homework. Go out and search for a broker that is suitable for your strategy and your preferences.
Jumping at an opportunity that someone else is trying to sell you will often end in misery when it comes to online trading. If someone is reaching out to you, e.g. on a dating app or through social media, enticing your to jump on this new great trading opportunity, be very suspicious.
Scammers often use “cold calling” strategies, which means they reach out to you. They can for instance send unsolicited emails or texts, hit your up through social media, or call you. It is unusual for reputable brokers to operate this way. They typically run normal marketing campaigns instead and they maintain an official site where you can seek outh the information you need.
It is a good to be aware that the old-fashioned romance scam has now merged with certain trading scams, so don´t be surprised if you are approached by someone online who starts out along the themes of romance or a sexy flirt, and then proceed with attempts to involve you in some type of trading or investment.
If you want to get involved with trading, do your own research. Pick your own broker, trading platform, trading strategy, risk-management strategy, and so on.
Test with small deposits and withdrawals
When you feel ready to make a first deposit into a trading account, there is no need to make a huge commitment. Test the broker by doing small deposits and withdrawals. If there is an issue, you will be happy that you only have $10 stuck in a frozen account and not anything more. Of course, some scammers are patient and will be on their best behaviour until you make a bigger deposit.
Important: The small transaction recommendation is only for brokers that you have investigated and that checks all the other boxes. If a broker seems shady in any way, do not make any deposit and do not give them any private information. Some fraudsters are posing as brokers or running a brokerage service to gain access to your private information, which will then be used for credit card scams, identity theft, and similar. Therefore, thinking that you can not lose anything more than your deposit is wrong. If anything seems fishy, walk away rather than testing the broker with a first deposit.
Bonuses
Many scam brokers will send you extravagant bonus offers. Don´t let this cloud your judgement.
- Do not pick a broker based on a bonus offers. Other factors are more important for your profitability as a trader.
- Some brokers will use a big welcome bonus offer to entice you into making a big first deposit. They don´t like it when a trader makes a $5 first deposit, find out the broker sucks and then cut their losses.
- Many reputable brokers have stopped offering bonus money to retail clients, because they are licensed by financial authorities that have banned this.
- Bonus money can come with complex conditions in the fine print. You may for instance find that your account is frozen (no withdrawals possible) until you have fulfilled certain bonus requirements.
Leverage
Do not let offers of huge leverage cloud your judgement when picking a broker.
- High leverage will boost both profits and losses to an immense degree, and is not recommended for beginners.
- The offer for huge leverage may not be applicable to retail clients in your part of the world, since many financial authorities have put a cap on how much leverage a broker is permitted to give a retail trader (non-professional trader).
Consider risk-diversification when it comes to brokers
We all know how important it is to diversify our investment portfolio, but have you ever considered diversifying when it comes to brokers? By using several brokers, and having your total trading bankroll divided into several trading accounts, you avoid putting all your eggs in one basket. If there is an issue with one particular broker, at least they can´t hold your entire trading bankroll hostage.
Transaction methods
Ideally pick a broker where you can use well-established and trusted transaction methods, such as major credit cards, bank transfers or a major e-transfer service (e.g. PayPal). Some methods offer dispute resolution options and can be helpful in fraud cases.
If you use wire transfers or cryptocurrency transfers, it will be especially difficult to recover any scammed funds.
If some one posing as financial advisor or similar is asking for payments/deposits in the form of iTunes gift cards or something along those lines, realize that this is a rediculous suggestion and simply stop all contact with the person immediately.
Automated trading systems, signal services, etcetera
Some fraudsters do not pose as brokers. Instead, they offer auxiliary products services, such as automated trading systems, signal services, etcetera. Sometimes they work in conjunction with a disreputable broker, to make the scam more believable.
- Do not let anyone take control or gain access to your trading account.
- Poorly performing trading systems can result in huge losses. Guarantees are typically never honored.