Generally, all the brokers and financial markets have to be regulated by regulatory organizations. The objective is to prevent traders from financial fraud. Importantly, these regulatory agencies enforce the laws and regulations that brokers must follow. However, some traders do not know how regulations are important to their brokers. Few of them sometimes choose to invest with an unregulated broker. Therefore, in this article, we will explore the important point of broker regulation.
List of Contents
- What Exactly Are Regulated Brokers?
- 5 Important Advantages of Using Regulated Brokers
- Why Do Some Brokers Avoid Regulation?
- The Risks of Using an Unregulated Broker
- Tip to Avoid Unregulated Brokers
What Exactly Are Regulated Brokers?
Regulated brokers are those who are registered with their country’s financial regulatory authority. The example is the FCA in the United Kingdom. Importantly, they must follow the regulations established by that organization.
To stay on the regulatory body’s listings, regulated brokers must be able to present proof of frequent audits. Moreover, they must always submit their accounts on time and comply with severe requirements. Unregulated brokers, on the other hand, are not required to follow any regulations and may act in any way they think suitable.
5 Important Advantages of Using Regulated Brokers
In this section, we will look at the advantages of using regulated brokers, so that you can make an intelligent choice.
1. Secure Trading Funds
Regulated brokers can ensure that traders will be able to withdraw their money in case a broker has issues. Thus, traders will not lose money in that scenario. Traders will have complete control over when and how to use the money.
2. Suitable Leverage
Regulated brokers are required to control their maximum leverage. Thus, this provides an additional degree of protection since excess leverage might lead to exceeding the money in investment.
3. Excellent Customer Service
Actually, all brokers can attempt to give the best customer service. However, regulated brokers are more driven to guarantee traders feel pleased with the service provided. The examples of excellent customer service are listed as follows.
- Offering essential trade information ranging from spreads to popular trading platforms
- Resolving any trading-related technical difficulties investors may have on the platform
- Developing and financing the trading account
4. Outstanding Credibility
Due to the obvious strict regulations, regulated brokers are also expected to adhere to correct bookkeeping and accounting standards. This is done to guarantee that their business activities do not overlap with any movement of traders’ money. This indicates that not only the money is protected, but the business is also operationally reliable and efficient. This inspires greater confidence in traders. This is because they always expect that there will be no interruptions in their trading.
5. Risk Warnings
Registered brokers are asked to give risk warnings. This guarantees that traders are aware of the average proportion of losing funds.
Why Do Some Brokers Avoid Regulation?
Being regulated increases brokers’ reputation and helps traders perceive that they are dealing with a trustworthy company. However, many brokerages operate without regulation in offshore countries for two reasons.
1. Reduce The Operating Expenses
One of the main reasons these brokers want to avoid regulation is that it allows them to reduce their operating expenses. Obtaining and keeping a regulation is expensive. It is often in the millions of dollars, so this may be an obstacle for those who are just starting out in a new brokerage business.
2. Reduce The Tax Burden
Another reason is that many of the unregulated brokers are located in offshore tax havens. Thus, it allows them to reduce their tax burden.
However, some unregulated brokers attack investors by committing fraud or participating in unlawful acts that may create financial hardship for their traders. Therefore, traders that choose to invest with an unregulated trader may incur big financial losses.
The Risks of Using an Unregulated Broker
Any trader who is willing to put the money with an unregulated broker is taking a significant risk with their capital. However, when traders choose a broker that is appropriately regulated, they put themselves in a position to avoid being taken advantage of or falling victim to fraud. This is something that is quite essential in the event that anything fails.
Tip to Avoid Unregulated Brokers
Due to a lack of knowledge about the necessity of choosing a regulated broker, many traders end up being defrauded by brokers that are not authorized. Thus, before depositing money into an account, you should always visit the firm’s website to assure that it is a trustworthy and regulated broker.
In conclusion, it is usually a good idea to choose a regulated broker. This will prevent you from breaking any of the many regulations and laws that brokers are required to follow. Importantly, before creating an account and depositing money, you should make sure that you verify the rules, terms, and conditions, as well as the regulations of the brokers.
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