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I know that a broker would try to do their best to help a customer learn if they are beginners so that they stick with them. Apart from that, do you think there might be other reasons behind doing it?

I have noticed how many beginners are attracted by the low spreads and even such statements as "1 click trade!!", which lead me to the conclusion that beginners can be easily misled. Hence, the broker knowing from the start whether their customer is a beginner or not may help them obtain larger profit margins (by factors that the beginners are not well aware of), and harder if the customer has some experience. What I am trying to say is that they will not try to fool the experienced traders because they may lose their business. That, in general, doesn't sound like a good broker to me.

So, is it normal for brokers to ask whether I am a beginner?

P.S. if that's going to help, the broker that asked me is activtrades.bg, which is the Bulgarian version of activtrades.com.

UPDATE: For the more curious of us, it's worth registering at Forex Factory to check this thread out. Definitely worth reading.

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    I'd imagine the broker just wants to gauge your understanding of the topics before explaining something to avoid either making your feel stupid (by explaining something at too high a level) or insulted (by explaining something at too low a level). It's pretty normal in sales to attempt to make your prospect feel comfortable.
    – quid
    Commented Mar 3, 2016 at 18:11
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    it could also be to gauge your level of understanding of what they are "proposing" or "doing for you" to see if you can tell the difference in the quality of the advise and how likely you are to follow it unquestioned because you don't know better, whereas an experienced person might challenge, question or see through bad advise or the very least is more proactive in decision making
    – GµårÐïåñ
    Commented Mar 3, 2016 at 20:03

4 Answers 4

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Brokers need to assess your level of competency to ensure that they don't allow you to "bite off more than you can chew" and find yourself in a bad situation. Some brokers ask you to rate your skills, others ask you how long you've been trading, it always varies based on broker. I use IB and they gave me a questionairre about a wide range of instruments, my skill level, time spent trading, trades per year, etc.

Many brokers will use your self-reported experience to choose what types of instruments you can trade. Some will only allow you to start with stocks and restrict access to forex, options, futures, etc. until you ask for readiness and, for some brokers, even pass a test of knowledge. Options are very commonly restricted so that you can only go long on an option when you own the underlying stock when you are a "newbie" and scale out from there. Many brokers adopt a four-tiered approach for options where only the most skilled traders can write naked options, as seen here.

It's important to note that all of this information is self-reported and you are not legally bound to answer honestly in any way. If, for example, you are well aware of the risks of writing naked options and want to try it despite never trading one before, there is nothing stopping you from saying you've traded options for 10 years and be given the privilege by your broker. Of course, they're just looking out for your best interest, but you are by no means forced into the scheme if you do not wish to be.

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    what makes you say "you are not legally bound to answer honestly". wouldn't lying on an account application constitute fraud? i realize that you are unlikely to be prosecuted, but technically it is illegal, right?
    – teldon james turner
    Commented Mar 3, 2016 at 18:24
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    @jamesturner I know we're getting into the legal side of things and IANAL so I can only share my opinion. I would question what part of the application is protected by law and what is a "customer survey" type of thing. I know that they have a legal requirement from FINRA to collect the information in order to prove that they are not marketing inappropriate products to customers, but FINRA can't reach out to harm individuals. My understanding is that the brokers are asking just to cover their own asses. You do raise a good philosophical point that I'd like to hear a legal expert weigh in on.
    – Brian R
    Commented Mar 3, 2016 at 19:48
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    legal or not, it is sad that regulations like this encourage people to lie :(
    – teldon james turner
    Commented Mar 3, 2016 at 20:57
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    @jamesturner In legal terms, fraud is a type of theft, which involves taking something of value from someone else. It doesn't apply to a situation where you're applying for the privilege of paying someone money for services. Of course, if the answers on trading experience are used to extend credit, that's a different matter, but it doesn't sound like that's the case here. Violating a ToS document is only ever stretched into a criminal case in the most egregious of cases, and even then, it's exceptionally rare for a criminal case to succeed
    – HopelessN00b
    Commented Mar 3, 2016 at 20:59
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    @WBT I am saying that it is different, legally, than theft by deception (AKA fraud). And you don't have to take my word for it... you are free, and even encouraged, to look for incidences of someone being prosecuted for fraud as a result of lying on a rental, university or club membership application.
    – HopelessN00b
    Commented Mar 5, 2016 at 2:16
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In Canada, for example, they are expected or required to find out.

They call it, The “Know Your Client” rule, part of which is knowing your "Investment knowledge and experience". They say it is, "to ensure their advice is suitable for you".

I have always been given that kind of form to fill in, when opening an account.

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Legal requirements

In many places there are legal requirements to do so, essentially made to prevent brokers from selling high-risk products as if they were deposits with guaranteed safety of your funds.

There also may be prohibitions on offering high-risk/high-return products to beginner customers, e.g. requiring accredited investor status claiming that yes, you really know how this works and are informed of the involved risks or you're not allowed to invest in that product.

Making untrue claims of being not a beginner may limit your options if your broker does cheat you in some manner, as it gives them a solid argument that you confirmed that you understand how their pump-and-dump scheme works and are yourself responsible for losing your money to them.

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Yes, this is common and in some cases may be required. They may use it for marketing at some level, but they also use it for risk management in deciding, for example, how much margin to offer and whether to approve access to "riskier" products like stock options.

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  • My broker in South Korea said he was legally required to determine experience level of investors and only sell certain classes of investment to experienced investors. When I set up my trading account they ended up hand writing two clauses of the contract into English, one about experience and one about acknowledging risk.
    – Myles
    Commented Mar 3, 2016 at 18:14

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