“Fraud is the daughter of greed.” – Jonathan Gash, The Great California Game

This quotation describing fraud by Jonathan Gash is the quintessential raison d’etre for the existence of fraud. And, when considered in the context of online financial market trading, it illustrates the fraudster’s position perfectly. Furthermore, the Internet’s global reach provides relatively easy access to the majority of the global citizens. This, in turn, increases the exposure that fraudulent operations have. Simply stated, it is straightforward for anyone to access the internet, and by inference to be exposed to both genuine and scam companies across all niches.

Fraud: A definition

Therefore, online traders, both novice and experienced, essentially have two options: desist all online investment activities or learn to differentiate between legitimate and fraudulent online trading houses. The first choice does not make sense because online trading is a viable form of income generation, and when approached from an intelligent, well-thought-out position, it has merit. Thus, the second option, learn to distinguish between scam and bona vide online trading houses, is an alternative worth exploring.

The first step in this process is to look a precise definition of exactly what fraud is.

Investopedia defines fraud as “an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim.” When this definition is inserted into the online financial market industry, it essentially means that anyone whose aim is to gain unlawful access to a potential client’s money is committing fraud.

Types of online trading fraud

Now that we understand what online fraud is, let’s take a closer look at the different types on fraudulent activities that are common in the online trading community:

Misrepresentation of facts

The distortion of facts or overstatement of profit and understatement of risk is a standard way of convincing traders that it is a good idea to invest large sums of money with a particular broker.  The reality is that online financial market trading is a high-risk venture. And, while it is entirely possible to increase your investments, it is never a good idea to trade large sums of money at once. In fact, a bona fide online trading firm will have a clear statement at the bottom of its website stating something along the lines of the following:

“Risk Warning: CFD trading is highly speculative and carries a high level of risk. You may sustain a loss of part or all of your invested capital, therefore do not speculate with capital that you cannot afford to lose. We strongly advise that you read our Terms & Conditions.”

Therefore, in summary, if the company you are considering trading through does not state that online trading carries a very high risk or indicates the opposite, then it’s better to assume that the firm is fraudulent and to stay away from them.

Know Your Customer (KYC)

The KYC process is designed to ensure that a business verifies the identity of its clients to assess whether or not the client is using its account for illegal gains such as money laundering and the funding of terrorist activities. In short, KYC’s aim is that of anti-corruption by verifying the client’s identity; thus, mitigating the organisation’s risk of being unwittingly involved in corrupt and illegal activities.

In most cases, KYC documents need to be submitted just after a trading account has been opened. Therefore, before you deposit any money with a broker, ensure that you are required to provide your KYC documents. Otherwise, it’s best to assume that the broker is fraudulent and you run the risk of losing any deposited funds.

Unsuitable investments

The exposure to risk or the ability to absorb losses due to high-risk investments is age-based. For example, a 21-year old can incorporate a much higher exposure to risk than someone close to retirement can. The older you get, the lower your exposure to risk should be. Simply stated, people close to retirement should not be taking unnecessary risks that will cause them to lose their retirement funds. Therefore, any online trading company who actively encourages high-risk trading as suitable for people nearing retirement is likely to be a fraudulent organisation.