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What Investors Should Know About Recent Stock Market Volatility

August was a tough month for many investors, as several major stock indexes posted their steepest declines in more than three years. Prompted by a sell-off in the Chinese stock markets which began in mid-June, American investors are now experiencing a resurgence in “volatility” with respect to their own portfolios. Such volatility also raises fears of increased stock fraud, as unscrupulous individuals try and take advantage of the ongoing situation.

Understanding Business and Market Risks

In response to recent events, the Financial Industry Regulatory Authority (FINRA) re-issued its Investor Alert regarding investment risks. FINRA said investors should always be aware of the difference between “business risks” associated with a particular company or industry, and “market risks,” which affect markets or the economy as a whole. For example, a current market risk is the possibility the U.S. Federal Reserve or the European Central Bank will increase interest rates. A business risk, in contrast, might include the likelihood a company will default on its bond payments.

Does Your Broker Follow Your Investment Strategy?

All investments involve some degree of risk. This means you are not a victim of stock fraud simply because there is volatility in the market. But volatility means you need to be aware of your own tolerance levels for certain types of risk. If you are pursuing a long-term investment strategy, recent fluctuations in stock prices may not matter much. Indeed, FINRA itself notes short-term volatility is common in long-term “growth stocks.” But if you are more concerned with the short-term liquidity of your portfolio, then volatility may caution you to move some of your money out of stocks and into more stable investment products.

It is important you communicate your desired investment strategy to your stockbroker or financial adviser. They are ultimately there to serve your interests, not the other way around. Brokers who ignore their clients’ wishes and make unsuitable investments with their clients’ funds can be sanctioned by FINRA or the U.S. Securities and Exchange Commission. In some cases, a broker or adviser may try and take advantage of market volatility to justify their own excessive trading activity (a practice known as “churning”).

Beware Scammers Taking Advantage of the Market

Market volatility may also make some investors more susceptible to traditional types of fraud such as Ponzi schemes. These schemes often lure investors with promises of “can’t miss” or “no-risk” investments guaranteed to produce incredible short-term profits. As with many things in life, if it sounds too good to be true, it usually is.

Again, losing money in a volatile stock market does not necessarily mean you are a victim of fraud. But if you have reason to suspect your broker or financial adviser—or anyone offering a financial services product—may be taking advantage of present market conditions to commit fraud, it is imperative you seek independent legal advice. A qualified Florida securities fraud attorney can review your situation and help you determine if your recent investment losses may be an indicator of something more sinister than a rocky stock market. Contact the offices of Gregory Tendrich, P.A., in Boca Raton today if you would like to speak with someone immediately.

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