Most people would suggest only trading with regulated brokers, but does that mean that all unregulated ones should be avoided at all costs?
Forex trading is no easy feat in nature. Currency prices are considered highly volatile, so the market might move in unexpected directions at any time. Traders must be prepared both financially and mentally to be able to face such challenges, not to mention the skill and knowledge to trade well too. Other than that, there's also the risk of being scammed or cheated by shady brokers.
So, if you're just about to begin your trading journey, do you have to trade with regulated brokers? The answer is yes, you do.
As a matter of fact, the first and arguably the most crucial step to take is you have to trade with a regulated broker. Here are the benefits you'll get from regulated brokers:
- High Transparency
- Protection from Fraudulent Activities
- Greater Protection of Clients' Funds
- Resolution in Case of Disputes
For a more thorough explanation of how important regulated brokers are, let's take a look at this article.
What Regulated Brokers Can Bring
Basically, a broker can either be regulated or unregulated. Regulated brokers refer to brokers that are officially registered and regulated by at least one financial regulatory agency. Each regulator has a set of rules and laws that are defined by the state and must be followed by all brokers under its watch.
These rules are created to prevent fraudulent activities or excessive risk-taking by the broker. If the regulated broker fails to adhere to the existing rules and procedures, the regulator may take legal action and even revoke the license.
The following are some of the benefits that you can get by trading with a regulated broker:
High Transparency
Regulated brokers are bound by the law to provide a certain degree of transparency to their clients, especially when it comes to financial matters, the company's system, and future developments of the company.
The main purpose is to avoid manipulation and false practices so that clients feel more confident that they are investing in the right place. Every year, the regulatory body would release an annual report on the brokers' current financial situation and compliance from which traders can check their worth.
Protection from Fraudulent Activities
Regulated brokers must comply with the rules imposed by the regulatory authority. Failure to do so might cost heavy penalties and even a permanent ban of the license. Hence, there's no space left for manipulation, scam, and other fraudulent activities.
This surely can ensure traders because they know that the broker won't trick them, manipulate the prices, withhold their funds, or purposefully make them lose money.
Greater Protection of Clients' Funds
Regulated brokers are required to put all of their client's funds in a segregated account held by top-tier banks within the country in which the broker is regulated. Some brokers that ensure segregated accounts are IC Markets, Exness, XM, Admiral Markets, etc.
This ensures that the client's funds won't be used for the broker's activities and are withdrawable at any time. Other than that, this also ensures that the client's funds are stored safely even when the broker is going bankrupt.
Resolution in Case of Disputes
Regulated brokers also offer a safety net for traders in case there's a dispute between them. If there's an issue, the trader can file a report against the broker to the regulatory body. Then, the regulator will act as the middleman and resolve the dispute according to the law. This is a privilege that you won't be getting in unregulated brokers because you're completely on your own if something bad happens.
What about Unregulated Brokers?
Brokers that are unregulated means that they're not tied to a specific regulator that could monitor their works. So, in other words, they are free to run their business as they please. Unfortunately, such freedom creates a gap that leads to forex scams and frauds. It's not uncommon to find shady, unregulated brokers on the market these days.
Typically, these brokers would offer fantastic deals to lure new customers only to run away with their money and disappear without a trace. This is the reason why unregulated brokers are often known as dangerous and fraudulent.
However, please note that not all unregulated brokers are bad. There are many reasons why a broker decides to stay unregulated. For instance, some brokers might still be working towards obtaining a license from a regulator. It's worth mentioning that the cost of obtaining a license might be millions, so not all brokers can afford that from the start.
Obtaining a license also takes a relatively long time to process, so it's possible that the broker is currently waiting for its license to be released.
What to Consider with Unregulated Brokers
We've mentioned above that not all unregulated brokers have fraudulent tendencies. But even so, we can't ignore the fact that unregulated brokers are highly risky. Since they're not bound to any law, unregulated brokers can practically do whatever they want and abuse their clients if they want to. It's important to know the following things before you think about trading with unregulated entities:
- There is no guarantee that the clients' information and funds will be kept safe. Traders can lose their money rather easily if they run into one of the scam brokers. No regulation means no accountability. Behind the shiny platform and amazing bonuses, there might be a planned scheme to steal their clients' money.
- As there are no special obligations that the broker must comply with, they might do things that only favor them and harm the clients. They might even go offline and stop the operation completely without any warning.
- If the broker is proven to be fraudulent or unfair, traders won't be able to complain or seek help from any market regulator because the broker is not bound to any law or rules.
How to Avoid Scam Brokers
When it comes to unregulated brokers, however, you need to do more thorough research. You might be confident, but keep in mind that a lot of scam brokers are difficult to spot at first. To avoid being scammed by a malicious broker, here are some red flags that you need to watch out for:
- The broker seems to enforce the get-rich mentality to new clients and encourage them to invest a lot of money.
- The broker promises a high return or success.
- There is little, ambiguous, or no contact and background information on the broker.
- The broker constantly promotes unsolicited marketing.
- There are negative reviews from previous clients and market regulators about the broker.
It is worth mentioning that apart from brokers, you should also be aware of scammers that disguise themselves as professional traders, law firms, and other entities that claim to be a part of the government's services. They basically offer funds to recover investments that have been lost to scam brokers.
In conclusion, regulated brokers are certainly preferable because they can offer higher security for traders. However, that doesn't necessarily mean that you should automatically eliminate all unregulated brokers on your list. To find out other important keys when choosing a good broker, check How to Recognize a Reliable Forex Broker.
8 Comments
Giancarlo
Jun 21 2022
How do I verify a broker?
Divany
Jun 30 2022
Giancarlo: The first step is to check the broker's address. Make sure that the address is legit and the broker can be contacted. Second, find out if the broker's regulated and check the license number on the regulator's website. If the two matches, you can continue. The last thing to do is to check the broker's compliance track record and read some user reviews.
Daisy Johnson
Jun 28 2022
These days, there are a plethora of brokers who offer services that aren't overly complicated yet nevertheless manage to entice investors. However, if we do not exercise sufficient caution while ing a broker, we can expose ourselves to a variety of hazards.
Therefore, I wholeheartedly concur with this article's recommendation that we an official regulated broker. Such a broker will have taken care of everything, from providing clients with security assurances to mediating conflicts that arise between brokers and customers.
However, we also need to exercise caution because not all regulated brokers are able to ensure clients' safety.
Jessica Drew
Jun 28 2022
New insights for rookie traders, as amateurs typically brokers who offer enticing discounts to entice investors to open trading accounts with them. This results in a large number of novice traders being enticed to invest through brokers whose services are not guaranteed to be safe.
Mockingbird
Jun 28 2022
Because there are still a lot of things we need to learn and because ensuring customer safety is not the main concern here, there are certain regulated brokers whose safety cannot be guaranteed. Additionally, we need to take into consideration a wide range of factors, including trading costs, transaction speeds, trading instruments, and many others.
Therefore, it is possible that a registered broker will not always be able to provide all of the things that are necessary in trading.
Harry Johnson Jr.
Nov 12 2022
Mockingbird: I disagree that customer safety is not a main concern. I want to ask you what's your first thought if you're keeping money to someone you don't know? Are we and the brokers are knowing each other? Some of your statement like providing some factors that make traders easier to profits, of course I agree with you. I think good brokers will always find another tool to support their trading system, this makes it easy for us as traders to use that tool to take profits but with a sense of security, but some brokers are not able to use some features and that tool due to regulations in some Countries. If we talk about regulated brokers, that means they follow the rules of your country. Imagine if we don't follow the regulations and laws in our country, we can become criminals according to our laws, right? Therefore, as good people who love our country, we must obey and comply with laws and regulations, including brokers. So why do some trading instruments have their own limits and some features are even banned, e.g. scalping trading, etc. This is because our government has of course reviewed and reviewed all the tools and features offered by brokers. If that feature and tool could lead to a loss (in the case loss because of broker feature), the government will put in place regulations to protect us from that. What if the brokerage firm is still not compliant? The government will consider the brokers as illegal , ex : if they scam you, can't pay you, or can't transfer your money, the government won't help you. (e.g. liquidation support, customer protection). So for me it would be better to use regulated brokers like my stop loss if the brokers can't pay me or go bankrupt the government will help even not 100% of my money will go back to me. Plus, it will help me avoid scams and money laundering. I also believe that professional traders always use brokers that are regulated in their respective countries.
Anthony
Dec 13 2022
Harry Johnson Jr.: the registered and unregistered brokers have the same service similarities. If you think using an unregulated broker is wrong, I disagree with you. What I will say is I agree with Mr. Mockingbird. Regulated brokers may have to comply with government regulations, so trading instruments, trading features, trading fees, and leverage vary and offer limited offerings due to the regulation. So, do not be confused if some traders choose other brokers located outside the country. I know some of them that are suitable for the features the brokers offer also they don't require a lot of deposits. I also agree that regulated brokers are safer. But I also said unregistered brokers are good, because unregistered brokers are registered in different countries, so brokers are actually It's regulated but not regulated in our country so it's basic for me to say it's safe but the weakness of outsider broker is if you have any issues you can only claim this broker in another country.
SS
Oct 10 2022
Dear MS,
I need help to start my forex journey. Currenlty I have an account in the TP global Fx which is regulated tarder but regulation from VFSC. Please give me guidenace.