Trading is a legal practice to buy and sell securities in the financial markets. Several regulatory authorities around the globe overlook the brokerages & license them as the volumes are surging exponentially.

The easy accessibility of trading platforms through the internet has bolstered the uptick in global trading figures in the last few years, and it has grown significantly during the pandemic.

Forex trading daily volume has increased from $1.2 trillion in 2001 to more than $6.6 trillion in 2019 according to reports by BIS. The trading volume of stocks, indices and cryptocurrencies is also advancing dramatically.

The increase in demand has also led to an increase in the scams associated with online trading. Scammers and conmen often pretend as brokers, advisors or agents; and take dishonest monetary advantage of inexperienced online traders, investors and general public.

In Africa, it is quite common to hear about online trading scams every now and then. The MBA Forex scam was among the major scams & a Ponzi scheme that was reported in May 2021. MBA forex company lured investments by promising a guaranteed return each month on the deposited amount.

It used to accept capital form 350,000 Naira to several hundred million. Eventually, the scam crashed and investors ended up losing millions to the fake scheme promising supernatural returns.

There is a high counterparty risk involved if the selected broker is not regulated by any regulatory authority. One must not choose a broker or trading service provider because you saw its advertisements or got recommendations from friends and family.

Research must be done on regulations, safety, and several other factors before choosing a broker. Traders can mitigate the third-party risk by considering several measures while trading online.

Here are some key signs that you must look at to know if the investment is a scam or legit.

5 Warning Signs that signal Investment & Trading Scams

Traders and investors need to stay cautious of scams and deceit before as well as after opening their accounts & investing any money.

There are some signs that most trading scams depict, and you can check to judge the probability of possible scams in the online capital markets.

Following are the major factors that can spot possible trading or investment scams in online trading.

No Regulatory License

Choosing a licensed broker or dealer is the most important step in online trading.

There are thousands of trading service providers & platforms available on the internet. However, many of them are not regulated or licensed by any financial authority. Hence are considered unsafe for trading.  

South Africa's Forex Brokers explains - “The details of regulatory licenses held by the broker in the present or past must be inquired by all individuals from their broker. Many regulated brokers mention their regulatory compliance details at the footnote of their website. “

“But you must not trust this information on face value. Some brokers may claim to be licensed, but are actually not. For example, a scam broker Bitcoin Xpress claimed to be a licensed provider in South Africa, but they were not.

"They used license number of another broker as their own license number. They gave FXTM broker's FSP number 46614 as their license number to investors. So, they were duping investors & misleading them into thinking that they were investing with a regulated broker in South Africa.”

“The validity of the license number must be verified from the regulator’s website. Most regulators have a page on their website where you can verify the Regulator’s licensed dealers.”

Stock and derivatives trading services providers are generally regulated and licensed by the stock exchanges of the concerned jurisdiction. In Ghana, investors can trade 37 equities and GSE Composite Index listed on the Ghana Stock Exchange. You can trade Commodities through the Ghana Commodity Exchange (GCX).

Forex and CFD trading are regulated by capital market regulators and authorities like FCA in the UK, FSCA in South Africa, CMA in Kenya, ASIC in Australia, CySEC in the EU, etc. But it is not yet regulated in Ghana.

Crypto trading is a comparatively new and it is not regulated in most countries of Africa. Some countries have made it illegal. While it is legal in many African countries, the market is still mostly unregulated.

Selecting a well-regulated and trustworthy broker or dealer is the first step to mitigate the risk of a trading scam in any capital market. Traders can also check the reviews by existing clients and experts online before choosing a broker.

Promise of Substantial Return with Little Risk

Among the most common methods to attract general public into a scheme is the promise of unrealistic and consistent returns with little or no risk at all.

Guaranteed high returns or dramatically consistent returns without adequate risk factors is impractical. Scammers and conmen will try everything to convince you to invest or trade with them.

Every capital market in the world has some risk associated with it. And returns cannot be guaranteed. If someone is promising outstanding returns that higher than average market returns of a period, without risk or at very low, you should be smart enough to spot the scam. You must enquire where your money is going and how it will increase/decrease after investing.

Trading and investing decisions shouldn’t be affected by statements such as “Everyone is doing it”, “I have also done it for me and my family”, “It is exclusively available for you”, etc. Everyone is obviously not doing it because each market is suitable for different types of traders and investors. 

Regulated brokers or agents do not use such lucrative sentences to attract traders and investors. They are not allowed to by financial market regulators. Rather they’d be more transparent with their financials, fees, commission, trading conditions, and risk factors with the concerned market.

Unsolicited Marketing

Regulated brokers generally do not use tactics like unsolicited marketing techniques to increase their clients. Fake brokers or scammers try to push their offers through text messages, email, social media, etc.

Online trading scams on social media are quite common. Profile of a traders on social media, claiming to be rich from forex, crypto must never be trusted. You should never trust trading and investment-related advisory or services on social media.  

Scammers may also try to offer you something for free. This makes the traders and investors feel obligated to buy what they are selling out of guilt. Smart traders must avoid falling into the traps of these conmen and make their own effort to seek a trustworthy source.

Rushing into Investment Decision

If they can’t convince you, they will try to confuse you. Scammers or fake brokers will offer unrealistic bonuses and might say “this is the last chance for you”. Investment and trading decisions made in haste are unsafe as the client will spend less time in research and analysis.

Some trading and investment opportunities might be time-bound but most of the instruments are not. Trading and investment can be done whenever the client is comfortable doing so. 

You must not feel rushed into investing your money. Any investment that you make must be done with proper due diligence.

Obstacles in Withdrawing

Withdrawal is the part where the broker needs to pay the clients. This is where online trading scams are commonly spotted. Fake brokers will put restrictions on withdrawals or reject withdrawal requests without justification.

Taking too much time in withdrawal, hidden commission on withdrawals, and limiting withdrawal amount to a lower level are the red flags.

Scammers do not want you to cash out and they may try to convince you to stay invested. They do not have any constraints on the deposit method and amount.

Regulated brokers have a convenient withdrawal mechanism that will be quite similar to that of depositing. They will also disclose the commission per withdrawal for each of the available methods of transaction.

Bottom Line

There are numerous early warning signs to identify the trading scams and deceitful brokers. Choosing a legitimate, trustworthy, and licensed broker or service provider can mitigate the probabilities of online trading scams.

However, traders need to stay smart and vigilant at every step in online trading. One must keep their login credentials safe and never leave their devices with account logged in.

Traders and investors cannot be completely safe from online scams but taking precautionary measures will certainly reduce the probability.