Forex trading is a field that many people wish to venture into. However, it has a steep learning curve, and one has to understand various concepts before they can trade successfully and reap profits. This way, others might start to ponder over the idea of trading for others, especially if they do not have the capital to do it but have the skills and believe that they can trade forex for someone else. How to legally trade other people’s money is a question often asked by these start-up traders.
Note that it is not as straightforward as it seems, as there are various legal hurdles along the way. In this piece, we are going to cover the issue of how to legally trade other people’s money in forex and give you a clear idea of whether you can do it or not.
What License Do I Need To Trade Other People’s Money?
If you have a few successful trades under your belt, friends or family might easily ask you to trade on their behalf. Well, you can do it, but there are a few legal reasons why you should avoid it unless you have the right licenses.
According to the law, you need to be a registered and licensed expert for you to trade other people’s money. The license might come in various forms as it will be mentioned below, but all these are meant to protect you from the consequences if the trade goes south, and you are held liable for the losses.
Note that these regulations are state-specific.
Generally, you have two options when it comes to trade for others.
The first one is getting a job at an investment firm and then trade for others while holding that position. Here, you will be legally allowed to trade, and you won’t find yourself on the wrong side of the law if things go haywire.
In this employment path, you will work for a financial advisory firm or brokerage. Regardless of the position you hold, be it an investment representative or an analyst, you will be legally capable of investing for others.
This is how most of the independent investment advisors start their careers. This position allows you to gain experience while still enjoying the cushion and control of the umbrella company you will be working for.
In most cases, you will be compensated in the form of commission, but you will need to take a few exams and fill specific qualifications before you can legally invest.
The second option is by being a registered investment advisor. Here, the legal requirements are relatively minimal as you only need to pass a specific exam and learn a few skills before becoming a Registered Investment Advisor.
However, going solo deprives you of the perks of working under an umbrella company, and you will need to do more work to manage the business. For instance, you will have to find custodians to hold your accounts and meet more compliance requirements.
The upside is that you will be more flexible and enjoy the potential of greater rewards down the road.
What Are the Rules for Trading Other People’s Money?
The law is very stringent on whether you can trade other people’s money, as this is equal to financial representation. In this regard, you will need to clear out a few things from the word go.
It is not advisable to borrow money from friends and family to trade for them, as you could find yourself on the wrong side of the law.
Note that there is always a possibility of you losing the money, and here, your relationship with them could easily change. If you lose the money, they could hold you liable, especially if you did not have any contractual agreements with them.
When trading other people’s money, it is advisable to use the set instruments, for instance, prop funds. These companies allow you to trade other people’s money under a set of instructions, and the people who you will be trading their money will understand what they are signing up for.
Prop firms do not give you the chance to trade other people’s money right away as they need to be sure that you won’t lose the entire sum. They will provide you with a simulation account with fake money where you trade as they test your skill, and once you hit a certain threshold, they will give you real money to trade with.
What Are the Legal Requirements for Trading Other People’s Money?
In most cases, the legal requirements for trading other people’s money are privy to the firm that you will be using to trade other people’s money with. In the United States, once you get a series 56 proprietary license, you should be able to cover your liabilities and cushion yourself from some of the negative impacts of losing other people’s money. It also gives you access to loads of capital.
How to legally trade other people’s money?
It is essential to understand why it makes sense to trade other people’s money. It is all in the mind, and trading other people’s money creates a shift in how you approach all this.
Most accounts have margin, and by doing this, you are already trading other people’s money. Being successful goes down to understanding how to do it successfully and the right instruments to do it.
As a novice trader, it is essential to know when it is too early to start trading other people’s money as you need to have the right skills and experience to do it successfully.
Paul , I have a situation where someone who lost his license and did not obtain a new one offered to trade my money but used it for personal reasons. He claims he traded and lost it all with no documentation to back it up. He was ousted and fined from the Chicago Board of Trade for illegal practices they found him guilty of. I believed he was on the up and up and he said he was set up in the situation. I found out later what he did. Do I have legal recourse? Or who could I talk to about the issue?