How to reduce the risk when working with a broker?

How to reduce the risk when working with a broker?

How to reduce the risk when working with a broker?

Protect your money

Generally, a broker can use your money and to their advantage. If the broker is a bank, he is legally allowed to do so. If the broker is not a bank, they will most often include a clause in the contract that allows them to transfer your money into their account.

As long as the broker is doing well, there is nothing dangerous about it. He lends your money to other clients for a short time, earns interest for it, and can lower the fee for his services for you.

But if the broker goes bankrupt, you can lose some money – the securities market law does not guarantee the return of funds that are withdrawn from the client’s account to the broker’s account.

So the main recommendation is not to keep money on the brokerage account for a long time.

Invest it in securities or withdraw it to your bank account. Firstly, the bank account can accrue interest. And second, money in accounts and deposits for individuals and sole proprietors are insured by the state. If the bank has problems, you are automatically entitled to insurance compensation up to 1.4 million rubles.

Another reliable way to protect your money is to open a separate (also called segregated) account. And you must also write in the contract that you prohibit the broker from using your money. If the broker’s license is revoked, you can withdraw all the money from your personal account without the slightest delay.

But the fees for maintaining an individual account are much higher than those for maintaining a general account. They can be so high that your income from risky stock market transactions can be lower than the interest on virtually risk-free bank deposits.

Protect your securities

A broker can use your securities if you give him permission. Such clause is often stipulated in the brokerage service contract. In this case, the broker is obliged to return the securities at your first request. And if you want to sell them, he must immediately execute this order and transfer the proceeds from the sale to your account.

Even so, you are taking a risk. If the broker borrowed your securities and went bankrupt, there is a high probability that he will not be able to return them.

Also keep in mind that stocks can pay dividends and bonds can pay coupon income. And when the issuing companies make a list of recipients of such payments, it matters who will be the holder of the securities at that time. If a broker holds the securities at that time, the broker, not you, will be on the list. Normally, the broker is contractually obligated to pass on the dividends or coupon income to you. But there is a risk that he won’t.

If you’re not willing to take those risks, you may not give the broker the right to use your securities. But it will likely raise the cost of the brokerage.

And even if you don’t give the broker permission to use your securities, he will still have access to the securities in your trading depo account.

Your trading depo account is credited when you buy securities on the exchange and debited when you sell them. You make these transactions through a broker. Therefore, the broker always has the right to send instructions to the depository to credit and debit the securities listed in your trading securities account.

Securities that you do not plan to sell yet can be kept in an ordinary securities account, which is not intended for trading on the exchange. However, you may not give your broker permission to dispose of the securities in that account.

If you want to sell securities on the exchange from a regular depo account, you will usually need to give two instructions at once: to transfer the securities from the regular account to a trading account and to sell. And if you decide to buy securities and keep them for some time, you can give two orders at the same time – to buy and transfer these securities to a regular depo account. If you do not plan to actively trade on the stock market, but want to invest in shares and keep them for at least a couple of years, you can use another option. You can open a personal account in the register of shareholders, which is maintained by the company-registrar. And transfer your securities to that account. Without your permission, the broker has no access to your personal account.

But you will most likely have to pay the custodian for transferring your securities to a personal account, and the registrar for opening and maintaining such an account. Find out the cost of these services in advance and decide if you are ready to spend the money. Keep in mind that the registrar’s license can also be revoked. And registrars also do not participate in the state deposit insurance system.

Keep track of your accounts

Investments should not be left unattended. Follow financial news and periodically request statements of your brokerage and securities accounts.