What You Need to Know About Online Trading Scams

Even before the advent of the internet, traders were getting scammed. Today, these scammers reach a wider audience because of the internet and do so with more anonymity.

Nigeria is witnessing an upsurge in online payment usage, and according to CBN e-Payment Statistics, Nigerians executed about 16 billion online transactions in 2021, and it increased to 22 billion in 2022.

As more Nigerians embrace online trading and use e-payments as ways to fund their trading accounts; scammers are also perpetrating scams online which target these traders relying on the speed & anonymity of the internet; where they can pose as a fake brokerage company or an expert trader using a fake social media persona, professional looking website & email to take away money using fast & anonymous online payment methods.

Unregulated Entities and Scammers Posing as Brokers

Among the most common trading scams is the unregulated persons and entities posing as brokers. The legality of a broker is based on its regulatory status with the appropriate government authorities.

In Nigeria, the Securities and Exchange Commission (SEC) is responsible for registering and regulating capital market operators, which includes online brokers and securities and commodity exchanges.

You can confirm whether an investment provider is registered by SEC by visiting the SEC website and clicking on “Capital Market Operator Search”. Additionally, for stockbrokers, you can visit the NGX stock exchange website and click on ‘Find a Broker’.

An online broker that is not registered by SEC or is not a member of the SEC-authorized exchange is most likely a scam or is unregulated or unsafe.

Reports have shown that many Nigerians still engage in alternative and unconventional investments such as cryptocurrency, CFDs forex trading, which are still unregulated, leaving a grey area to be exploited by bad players.

Cryptocurrency investments had recently been banned in Nigeria while Forex trading is still unregulated by SEC but is not illegal; this poses investment risks for traders as these instruments lack regulatory oversight.

SEC had issued a Public Warning on Retail Online Forex Trading in Nigeria, saying forex trading is not regulated by them, and you do so at your own risk.

Due to this absence of regulation in CFD and Forex Trading space, Nigerian traders need to ensure that the foreign forex brokers they deal with are under relevant regulations in their home countries.

When dealing with foreign brokers, it is important to note that not all foreign regulators are of the same calibre. The regulators in developed economies, such as the Financial Conduct Authority (FCA) of the UK, and ASIC of Australia, are often regarded as Tier-1; and are considered safest due to their strong investor protection, regulation and oversight. Many brokers have faced harsh penalties from FCA and ASIC for not following rules. So, traders can be sure that the tier-1 regulated broker will not engage in bad practices and will offer services as per the directives of the regulators.

But if you see brokers regulated in Island nations like the Bahamas, Saint Vincent & The Grenadines, Mauritius, etc. You need to beware as these countries have weaker regulatory laws and are not Tier-1 or Tier-2 regulators. So, there is a high possibility brokers under these regulations will likely engage in fraudulent activities flouting rules, and you would have no regulatory discourse or action to recover your funds in case of wrongdoing by the broker. So, any broker below tier-1 or tier-2 regulation must be avoided.

Africa too has reputed tier-2 regulators like FCSA of South Africa and CMA of Kenya that offer similar investor protection, regulations at par with FCA, ASIC to CFD & Forex Traders. According to this research into forex brokers in South Africa, there are 8 forex brokers that accept traders from the African continent and hold multiple regulatory licenses, including Tier-1 & Tier-2 licenses.

These days foreign brokers get multiple regulators across the globe to license them, and the more regulators, the safer these brokers are.

You still need to confirm their regulatory status by visiting the foreign regulators’ website and viewing the list of licensed financial service providers.

In summary, a broker that is not registered by the Nigerian SEC or is not a member of an authorized exchange like NGX and also is not registered by multiple international regulators is operating illegally and is most likely a scam. You should avoid trading with such online brokers.

Many Scams Originate from Social Media & Dating Sites

Online trading scams through social media take different forms. Fraudsters can impersonate legitimate brokers or pose as legitimate investment advisors and create a fake profile and webpage to accompany it.

They then convince unsuspecting online traders to trade via their platforms or invest in markets via them; if you send money to them, it is gone.

Sometimes, you can be asked to keep sending money to them until you realize it is a scam. You can prevent this by only following verified company handles on social media and carrying out proper background checks on the website before investing. You can also verify Broker’s genuine website from Regulator or Exchange’s website. Most regulators and exchanges list the official websites and contact details of their licensed brokers.

Trading scams on social media can also take the form of romance. Here, the scammer creates a fake profile on dating apps, seeking a romantic relationship with you.

At some point in the relationship, you are introduced to a fake investment scheme with the promise of high returns. It could be forex, stocks, crypto, etc.

You will be encouraged to keep investing funds, but when you ask to withdraw your winnings, you will be met with excuses such as you need to pay taxes, you need to invest for a certain number of years before you can withdraw, etc. This goes on till you give up trying.

Online trading scams via social media can also take the form of a pump and dump scheme,  where the scammers create a social media frenzy on platforms like Twitter, Facebook, Youtube, ticktok or Reddit about a particular stock (usually penny stock),  falsely claiming its price is about to explode. A scammer would usually pose as a market expert offering legitimate research, investment calls,  insight or some insider information, causing mass sharing viral effects on social media.

This frenzy makes a lot of people buy the stock, thereby increasing its price. The scammers would then immediately sell off huge volumes of the stock, causing its price to fall and leaving other buyers with worthless stock.

You can prevent this by avoiding securities with unusual social media buzz.

Scams Can Hide Behind Celebrity Endorsements

Celebrities, community leaders, influencers, or even religious leaders can unknowingly promote online trading scams.

Scammers understand that you hold these figures in high esteem, and most likely believe any information from them.

Today with the trend of brand ambassadors, some online influencers promote suspicious brands in order to get a paycheck. Celebrities, influencers, & skit makers are not qualified to give investment advice. Always confirm all investment offers from the SEC website before you deal.

Scammers May Pay You Initial Returns to Win Your Trust

Scammers sometimes pay your profits for your first investment. This gives you the illusion that they are legit and prompts you to commit more funds.

This is the classic Ponzi scheme style where the earlier investors get paid with the money of the later investors. Once you commit substantial funds, you are blocked from withdrawing any more money, and when you insist, the scammers cut off communication.

Scams Downplay Risks and Emphasize High Rewards

Online trading comes with risks of losing, and no matter how knowledgeable you are, you cannot avoid them. Even the best traders in the world only have a 6 out of 10 win rate. It is, therefore, important that your broker keeps you informed of the risks in online trading.

If your broker sugarcoats online trading and downplays or completely ignores the risks, you should be suspicious.

Also, if a broker lays great emphasis on huge returns to be made via online trading, he is likely to be a scam too.

Scams May Send You Malicious Links to Download Trading Apps

You risk downloading the fake version of a trading app if you download it from unknown sources.

Google Play Store and Apple Store are the safest places to download because they scrutinize the apps for any malware and carry out regular scans to ensure the apps are not infected.

A reputable online broker will host his trading app on either the Google Play store or the iOS app store. This is not to say Google Play store or the iOS app store are immune to fake apps, but the chances are lower.

Scammers may also send you Android Package Kit (APK) executable files to download the app, and this too is dangerous as it can contain hidden malware.

Request to Deposit Funds Via Malicious Payment Links

A payment link enables the creator to receive payments from others without the hassle of building a website and integrating a payment gateway.

They usually exist as URLs, QR codes, etc. It is common for businesses to send payment links via apps and SMS.

Scammers could impersonate a legitimate broker, but at the point of payment, a link is sent to you, and the money goes to the scammer instead.

Things to Remember

Online scammers can be very professional and build good-looking websites. They are part of a global organized crime ring, hence their sophistication.

They have even gone as far as using deep fake technology for video calls so that they can impersonate even people close to you.

They target everyone, even you in Nigeria, as far as there are gains to be made. This is why you must ensure you carry out a background check on the broker and ensure there is no red flag before trading with an online broker.