Trading in the financial market is heavily dependent on transparency and integrity of the players. When dealing with financial traders and stockbrokers, you may not always be able to verify the authenticity of the deals and the schemes they offer. They may not be able to accurately predict the market trends and you shouldn’t give in if they guarantee you high returns.
In the United States, securities fraud or stock/investment fraud is a white-collar crime, wherein an individual or a company knowingly misrepresents information about fraudulent investment schemes to deceive potential investors. Securities fraud cases are heard by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Federal and state laws work in favor of the defrauded investors to provide a legal remedy to recover their losses.
Investment losses are, generally, the result of inconsistent market forces, trends and factors that cannot be directly linked to securities fraud. But, if you are trapped in a fraud which resulted from the wrongful action of your stockbroker, you ought to take necessary legal actions and recover your losses.
The following information will assist you in protecting yourself from frivolous investment claims and securities fraud:
1. Be Alert about Excessive Trading
Large and frequent short-term trades within a mutual fund increase the administrative costs associated with processing shareholder transactions. Such trading practices, known as excessive trading, can make it difficult for you to manage your fund’s portfolio. Further, they can increase the costs associated with securities of your trading portfolio.
Frequent trading also involves the risk of diluting the returns earned by other fund shareholders. If you try to make too many short-term trades, you will not be in a position to buy or sell your stocks in the long run.
Remember mutual funds are not designed to be frequently traded and you shouldn’t agree to sell these funds over a short time period. A situation may arise where you purchase a fund after being convinced by your stockbroker, but then aren’t able to sell it quickly. In that case, you may be forced to hold the fund regardless of gaining or losing anything.
2. Prohibit Unauthorized Trading
Bear in mind that there are only two conditions under which your stockbroker can transact on your behalf. The first is if you have granted him/her with the discretionary authority and the second is when a detailed permission letter is signed by the two of you. If you are in a situation which does not include any of these conditions, it’s possibly an investment fraud.
Stop your broker from executing trades using your trading account, unless you approve of it or have authorized the trade in advance. A stockbroker is legally bound to intimate you of the scheme details before closing any deal. Make sure that he/she is carrying carry out all of your instructions. Engaging in unauthorized trading can be treated as a valid reason to sue your stockbroker. Consult a stockbroker fraud lawyer to help you with the legal proceedings regarding the same.
3. Check for Violation of Obligation of Disclosure
Stockbrokers are obligated to disclose all relevant information to their clients related to an investment recommendation. This is because even the smallest detail may be useful to you in making an informed investment decision. In particular, your stockbroker ought to disclose all the various risks and levels of risk involved in an investment recommendation.
Ask your broker to maintain a formal communication record, along with the details of your trading profile. Brokers have a duty to be truthful in all communications with their clients. Ensure that the communication provides you with a sound basis to evaluate any securities being recommended. Pay attention to the details mentioned in fine print and do not accept exaggerated, false or misleading statements.
Educate yourself about the portfolio management processes, including allocation of investment opportunities, consistency of your portfolio, investment objectives, and the regulatory restrictions applicable.
4. Avoid Overarching Risky Investments Schemes
When evaluating your stockbroker’s claims, keep in mind the standardized average returns that are accepted as a general trend in the financial market. You should analyze the company’s performance record and seek clarification from your broker about any discrepancies. Caution yourself about high-risk schemes and avoid investing in them if you aren’t confident about the returns. If a broker claims that certain fund scheme or investment will return more than the usual returns or that any profits are “guaranteed,” it may be a good idea to avoid that deal.
Study the market trends and factors impacting the performance of the company you’ve invested in. Even the best companies and funds aren’t able to stabilize their stock value and vary their annual returns on a regular basis.
High returns on investments are highly atypical and cannot be the same throughout the year. Any financial trader may be able to predict anything close to the returns, but cannot guarantee a figure. As an investor, you can expect fluctuation in returns from stocks, bonds, mutual funds, Real Estate Investment Trusts (REITs), and other kinds of publicly traded, moderate-risk investments.
Therefore, if you find your broker claiming that “your money will double in a certain period of time,” or is “guaranteeing” certain returns, then they may be trying to cheat you and you may want to consider reporting them to FINRA or the SEC.
Financial markets aren’t always smooth-sailing zones. Along with fluctuating trends and stock values, you need to monitor the credibility of your stockbroker as well. It is advisable to always conduct reference checks on a financial agent before entering into a business relationship with him/her.