In addition to their rights in relation to the company of which they own a piece, investors have a right not to be ripped off by the financial community. This is the part that is mainly watched over by the regulatory authority. It regulates British brokers and dealers, whether they are in a City office or dealing via the internet, but nobody regulates the internet. Inevitably, the net has been a happy playground for some shady operators, ranging from various types of fraudsters to people operating pyramid schemes. Some have set up bogus websites to look like the pages operated by real investment companies, in the hope of getting unsuspecting people to part with their money. In addition, the net is awash with rumours, many of them carefully placed to drive the price up or down so the instigator can sell or buy as needs be and make a killing. The authorities in the more responsible countries pursue these people, but the net is too vast to be watched.
The London Stock Exchange also regulates its own market. The Exchange’s computer has a sophisticated program trying to spot unusual patterns, and if there are untoward movements in advance of an official announcement (eg a sharp rise just before a bid is disclosed), the Exchange authorities investigate. Despite some apparently suspicious circumstances, however, they hardly ever find anything untoward. Prosecutions for insider trading are rare, and convictions even rarer.
Relying on somebody else to pick up the pieces and fight the battles for feckless or foolish investing is a mistake. A little elementary care can prevent a lot of mistakes and save much effort trying to assert one’s rights later. For instance, you should use only authorized businesses to act on your behalf, and that is easy to check on the register of the regulatory authority. Before starting any transactions, check the costs and fees. The first rule is, if there is anything you do not understand – go on asking for an explanation until it is crystal clear. It is much better to seem foolish by asking questions than to be foolish by not having the answers.
Source: Becket Michael (2014), How the Stock Market Works: A Beginner’s Guide to Investment, Kogan Page; Fifth edition.
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