How safe are stock broker nominee accounts?


When you’re choosing a stock broker, cost is not the only consideration. You should also think about how safe your investments will be from fraud or loss.

Many investors don’t understand exactly how their shares are held and what the risks to their account are if the worst happens. So this article explains a few key points about how brokerage accounts works and what happens in the event of fraud or loss.

In particular, we’ll look at why nominee accounts and segregation can’t protect you from all risks, plus the main things you can do to protect yourself from the chance of a stock broker collapse. Continue reading »

Nov 012011

You’ve probably seen that MF Global, one of the big brokers in futures, options, CFDs and other derivatives has gone bust. While we haven’t heard all the details yet, this seems like it might be a rather worrying case when it comes to the safety of your brokerage account.

MF Global went under because of trades it was making on its own account (known as proprietary or ‘prop’ trading). Specifically, it had bought European sovereign bonds on high leverage and couldn’t make the margin calls when these fell in value (fuller details at the FT).

This was an extremely stupid thing to do, but it was MF Global’s own bet. It shouldn’t have mattered to clients.

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Investor compensation scheme limits


Whenever you put your money with any financial firm, you want to be sure that it’s safe. So the most important question every investor should ask themselves before signing up with a stock broker is: “What protects me if this company goes bust?”

This even more important if you are planning to use a broker outside your own country. After all, most investors have some idea about the investor protection rules at home.

But these rules don’t apply when you put money into an overseas financial institution. Instead, you will be covered by the regulations in force there – which may be stronger or weaker than you are used to.

This note looks at the investor compensation scheme limits in a number of countries. It’s only a summary – you should check the detailed rules yourself before opening an overseas account. But let’s see how safe your money in the US, Singapore, the Isle of Man and many more.

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