Types of Stock Broker Fraud You Should Know About

by Mike RubinsonSeptember 18, 20209, 18, 2020

Stock Broker Fraud

Stock Broker FraudThe stock market is one of the oldest markets in the world and one that has a high profit potential. Thousands of traders from all over the world have made their fortunes through this market, due to which it constantly draws more traffic. Since online stock trading has become the norm, there has been a greater influx of people into the market. While it is true that trading stocks involves risk and part of it is due to the unpredictable nature of the market, but there is additional danger in the form of unscrupulous stockbrokers that are operating in the market.

Online scams are quite prevalent these days and the stock market has also become a hotbed for different kinds of fraud. Stock broker fraud has become common nowadays, as there are hundreds of brokers offering their services. The fraud brokers have become very sophisticated and they appear to be professional and genuine, which can make it difficult for people to identify them as a scam. The easiest way to accomplish this goal is to know the different types of stock broker fraud, so you can steer clear of such unscrupulous activities.

Outlined below are some of the ways that stock broker fraud can be committed and you need to be extremely careful when you are working with an online broker for trading securities:

  • Supplying misleading or false information

A common type of stock broker fraud is when the broker provides you misleading or incorrect information. This can be for a number of reasons, from supporting their own personal investments to simple negligence. Such situations, along with trading instances that are based on insider information are regarded as broker malpractice.

  • Misrepresenting or omitting facts

There are situations where stock brokers often try to influence their clients’ investment choices by either omitting information or misrepresenting facts that can dissuade them from making certain decisions or taking some actions. This means that traders will not be able to make informed decisions and results in stock broker fraud.

  • Breach of promise

Also referred to as ‘breach of contract’, this refers to any situation where your chosen stock broker is not honoring the terms that have been set forth in your initial investment contract or agreement. Proving these violations is easier, as opposed to some other kind of financial fraud.

  • Abuse of margin accounts

Generally, when you make an investment through a stock broker, the amount is deposited in a cash account. But, where margin accounts are concerned, they consider your investment as collateral for an equal amount, which means your investment potential is doubled. In normal situations, brokerage fee is charged on the normal amount that traders invest, but less scrupulous brokerages are known to charge their fee based on the increased margin account balance. This is also a kind of stock broker fraud you should be aware of.

  • Not following standards

When you hand over the responsibility of managing your money to someone, they should do this job diligently and also protect your interests at the same time. Any stock broker that operates outside these parameters will simply not live up to their fiduciary duty and they can be cited for a number of specific violations.

  • Lack of supervision

This particular kind of fraud is applicable to brokerages who are responsible for supervising their employees and protecting their clients. When any of the aforementioned infractions are committed by a broker, their company will face penalties for not being able to supervise their activities properly.

  • Trading without clients’ consent

According to the law, stock brokers are required to obtain authorization from their clients before making any transactions on their behalf. Your broker needs to inform you about their terms and conditions beforehand and should not use your trading account for making any transactions without your consent. If they fail to do so, you can take legal action against them because this will fall under the category of stock broker fraud.

  • No licensing and registration

Again, the law dictates that all stock brokers and brokerage firms should obtain a license for providing their services and this can be done by getting in touch with specific government agencies. Any broker that doesn’t follow these legal channels will be committing securities fraud and can be penalized for it. In order to avoid stock broker fraud, you should always check a broker’s licensing and registration before you sign up for their services.

  • Investment fraud

As mentioned earlier, stock brokers may be permitted to make transactions on your behalf under their terms and conditions. However, all trades they make should be in accordance with your level of risk and the potential gain you require. If they don’t work within the guidelines you provide and don’t take steps that are in your interests, it will be regarded as investment fraud and they can be held responsible for it.

  • Negligent portfolio management

Another kind of stock broker fraud is the inability of the broker to execute your instructions regarding how and where your money is invested. Not doing so, even when the broker believes they are protecting your interests, is considered negligence.

  • Lack of diversification

It is irresponsible and ultimately, illegal, to over-concentrate an investor’s portfolio. Not offering diversification opportunities can also be a kind of stock broker fraud because it is an important part of the market and not being able to diversify can often lead to heavy losses for the investor.

Knowing and understanding the different ways stock broker fraud can happen will go a long way in helping people avoid them. However, in the event that you do become a victim, despite taking precautions, it doesn’t mean that there is nothing that can be done. You can make use of services like Money-Back that specialize in recovering money from a wide array of scams. You can get in touch with them for dealing with stock broker fraud and take a step towards recovering your funds from the fake broker.

Anat Samovski


I was working in the risk dept of a major binary company, after a few months I understand what this industry is all about and I left. I believe that it is divine providence that MoneyBack found me and hired me. I know how many people fall for this kind of scams and I know what we can do for them I wish we could have gotten to them all. If you lost money to a rading scam online please sign up because we can help you!!

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