Chapter 2, Part II. And what about the stock market? Page 6

MYTH #10 The safety of assets and trading procedure on the FOREX market and the Stock market are the same

False

The major difference between stock market and FOREX is application of segregated trading accounts on the former and their absence on the latter. A segregate account is an account only for a client’s trading assets that is separated from the assets of the brokerage firm. A brokerage firm can only use these assets due to a client’s orders and in favor of the client. It can’t use them for their own interests. What does it mean for ordinary client? It means, that if a stock brokerage firm will fall under bankruptcy or meet some financial difficulties, the client’s assets will be untouched and in safe. Personally, I’ve seen this event during REFCO forex brokerage bankruptcy procedure. Other people who have traded on the FOREX market have lost all or part of their money in cases like this. On over-the counter markets, client’s assets are transferred to the account of the broker. This is also typical for the bond market that is also an over-the-counter one. Some FOREX brokers claim to keep client money in segregated accounts. Demand to see proof of this before believing such claims.

Also, there is an insurance pool for client’s stock brokerage accounts in existence with $15 million in assets on average. So, stock trading accounts have much stronger safety than FOREX accounts.​

MYTH #11 FOREX market and the stock market are both highly regulated by government authorities.

False

This statement is not correct for some reasons. First, the stock market is highly regulated by the exchange itself. Second, the US stock markets are highly regulated by the SEC (Securities and Exchange Commission). It is a government authority which has the major purpose of monitoring the appropriate functioning of the stock market with a priority on the interests of ordinary investors. The SEC also has strict rules for stock brokerage companies – minimum capital, licensing etc. In general it is not a simple task to become a brokerage company on the stock market.

On the FOREX market rather, brokerage companies have no particular regulation, except for national laws and regulators. Most US FX Brokers become a member of NFA (National Futures Association). We will talk about in the next part, but until recently, they didn’t have a full legal obligation to join the NFA or any regulator. In general, a FOREX broker is just a financial company that can meet with ordinary financial problems and other unwelcome moments that can in general could happen with any financial company. So, despite of any loud scandals and law processes with stock brokers, in general, the stock market is regulated much more strongly than FOREX.​