How can first-time investors avoid being scammed?

While having a steady income may be a life goal for everyone, more and more people are trying to supplement their income by trading in various assets. However, with a potential of exponential growth in wealth, trading is increasingly becoming a target of large-scale financial fraud. So, how does one remain safe in trading?

Less than six months ago, when global markets fell on fears of Covid-19 and brought an end to the decade-long bull run, most people felt the opportunity was ripe to trade and make great wealth through financial markets. The trick was simple: buy stocks, commodities or exchange-traded funds and wait for the post-Covid-19 market rally.

The challenge, however, is selecting which online trading broker to use to deal in these assets. With the recent increased attention on DIY investing, there has been a surge in first-time investors who have little, if any, experience in investing in financial markets. With so many amateur traders out there who get conflicting tips from family and friends, it can be overwhelming to decide which online trading broker is suitable.

Some sophisticated online trading brokers take exorbitant commissions on your trades, while others are outright scams, preying on novice investors. Traditional local brokers are available, but even those that operate as execution-only brokers come at a premium – making it a difficult task for a new or prospective trader to start investing their money.

With the advent of technology, online trading is the new buzz. It is cheap, has plenty of asset classes to choose from and gives you real-time updates on your phone. However, it is true that many fall victim to fraudulent activity due to alluring websites that feature slick content offering significant leverage, bonuses or even guaranteed profits.

As such, it is imperative that an investor looks beyond the marketing and conducts due diligence on the online broker. One key area of research should be the jurisdiction where the broker is regulated.

Many online trading brokers are not regulated in a local or regional jurisdiction, which may be a drawback for a discerning investor. A new investor, on the other hand, may not be aware of the intricacies of regulatory law under different jurisdictions, nor the related frameworks designed to protect their capital.

Within the UAE, for example, DIY investors should ensure they opt for a locally regulated broker. For example, a broker regulated by the Abu Dhabi Global Market’s (ADGM) Financial Services and Regulatory Authority (FSRA) or the Dubai Financial Services Authority, the independent regulator for Dubai International Financial Centre, that follows stringent rules and regulations, modelled on internationally recognised standards to safeguard the best interests of investors.

With online brokers regulated in other jurisdictions that do not require a minimum capital to cover operational risks, it is virtually impossible to guarantee that clients’ funds are in safe hands when they are not allocated in a segregated clients’ fund bank account. They will be regulated by the jurisdiction in which the licence to operate was granted.

Moreover, if a dispute is raised and a legal process applied, a different jurisdiction means a cumbersome approach that is likely to bear a prohibitive cost due to legal fees and travel expenses. However, local regulators, such as the ADGM FSRA, provide investors with a clear and effective mediation should an issue occur.

Inexperienced traders are most vulnerable to online fraud and trading scams that have caused billions of dollars of losses around the globe, including in the Middle East.

So, what can be done?

Nothing substitutes education. The first step for any regulated broker is to ensure educational tools are available for traders, not just to identify fraud but also to ensure they are empowered to make informed trades. If the users are unable to find enough educational material, it is probably best to steer away.

A locally registered broker provides an extra layer of security as it falls under progressive legislative frameworks to safeguard the capital of traders. In the unlikely event that an issue occurs, authorities such as the ADGM have rigorous procedures in place to ensure that investors’ capital is safe and protected.

To protect the growing number of DIY investors entering financial markets for the first time, education is vital to ensure they remain vigilant about the growing number of fraudulent brokers.

Investors must consider many aspects before starting to trade online, but the most important step is choosing the right broker, who should be locally registered and provide strong educational content so that their hard-earned money is not wasted.

Madalina Rotaru is the chief executive of Key Way Markets Limited, the operator of the ADGM FSRA-licensed Capex.com