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.

Trading with regulated brokers to avoid being scammed

If you're just about to begin your trading journey, the first and arguably the most important step to take is choosing the right broker to invest in. This can be quite a tricky process, especially for beginners because not all brokers are good or bad. One of the characteristics to look out for in a broker is the regulation. Here's everything you need to know about it.

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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 clients' funds in a segregated account held by top-tier banks within the country in which the broker is regulated. This ensures that the clients' funds won't be used for the broker's activities and are withdrawable at any time. Other than that, this also ensures that the clients' 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.

Other brokers might not have malevolent intentions per se, but simply prefer to stay unregulated due to the perks. The first possible explanation is regarding the general cost of the business operation. By not having a license, the broker can fully enjoy the money that would have otherwise gone to the government or regulatory authorities. This also translates to a much cheaper tax and lower expenses. As a result, they can offer more bonuses, cheaper trading products, and lower trading fees for their clients.

Another thing is the fact that unregulated brokers are not tied to any regulator's law. Typically, each country has certain restrictions on forex trading like how hedging is forbidden in the United States. This may encourage some brokers to stay unregulated because then they can offer a wider range of trading services. They can also attract more customers from anywhere on the globe since the platform can operate without any geographical limitations.

 

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

Now that you understand the importance of choosing the right broker, we're going to explain how to identify scam brokers. The easiest way to do it is by checking the broker's regulations. Make sure to double-check both on the broker's website and on the regulator's website so you know that the license is legit. If you find that the license number is unavailable or linked to another broker, then you might want to reconsider choosing it because that's not a great sign. But if the license is confirmed on both sites, then you can relax a bit because regulated brokers are less likely to do malevolent things, especially if they are under the watch of top-tier regulators like the CFTC, the FCA, and ASIC.

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. It's important to understand that safety is not the only thing you should worry about. There are other equally crucial things in forex trading, such as trading cost, transaction speed, trading instruments, etc. Thus, you need to make sure that your broker provides all the things you need to trade comfortably. Do as much research as you need and don't hesitate to contact the broker if you have some unanswered questions.