Online Trading Regulations
The stock market provides a major source of investment funds for public companies, and it is a place where individuals and investment firms can invest, hoping to profit from the future success of industries and individual businesses. Both private individuals and professional stockbrokers or traders can buy and sell shares online. The U.S. Securities and Exchange Commission (SEC) regulates online trading as well as traditional stock trading to protect investors, businesses and the economy in general.
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Customer Agreements
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Stock traders and online brokers enter into customer agreements that regulate the nature of their transactions and their legal obligations to one another. When website users agree to the terms of service for a given online stockbroker, or when they authorize a transaction by providing the requested personal information, they are entering into contracts with the online brokers. As a result, the customer is bound by the broker's fee structure and liability limits for transaction delays. At the same time, the broker must provide the stated service according to the terms of the agreement.
Legal Obligations
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Online stockbrokers are legally required to meet what is known as a suitability standard. This means online brokers must try to match an investor's goals (to make money) with their investment choices (stock purchases and sales). In the case of online brokers, withholding information or failing to disclose accurate financial data to consumers is illegal. However, online trading is not regulated by the stricter fiduciary standard, which imposes a code of ethics on financial advisers. Online trading lacks the protection of a fiduciary standard, which means online investors can get added protection by hiring a financial adviser for investment advice while performing stock transactions online themselves.
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Insurance
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Investors who buy and sell stock online can take some comfort in the fact that each of their transactions is insured. The Federal Deposit Insurance Corporation (FDIC), which also insures bank accounts and traditional stock transactions, insures each online stock trade for up to $250,000. In the event of a fraudulent trade on the part of an online broker or anyone who gains unauthorized access to an online stock trading system, the FDIC will pay investors for their losses.
Certification
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Despite the fact that an investor makes online stock transactions with a simple click, the Securities and Exchange Commission holds online brokers to its certification regulations. This means each individual who buys or sells shares of stock on a stock exchange must be certified and licensed according to the rules of that exchange. Online brokers hire certified stockbrokers at each exchange where they allow users to buy and sell. In this sense, online stock trading faces the same regulation and oversight as old-fashioned, in-person trading.
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