The ethical issues ans common unethical practices prevailing in the stock market and some advise for brokers

1. By :
T Guru Aarat
Sahej Narang
Anand Saran

2.  It is no secret that the investment industry is plagued with
awkward and seemingly unsolvable conflicts of
interest. Brokers want to earn commissions and are often under
intense pressure to do so. But what brings in the most money
for the broker is not always what is best for investors - or what
they really want. The temptation is to sell excessively risky
products because they are more lucrative than the low-risk
alternatives.
 Everybody has to make a living, brokers included, and
everyone knows that; however, deliberate attempts to confuse
or miss-sell in any way are not only unethical, they may come
back to haunt the broker in the form of soured relationships or
even claims for damages. There are obvious things a broker
should avoid: lying, misrepresenting and hard-sell tactics;
however, some unethical behavior is more subtle, but no more
acceptable.

3.  Insider trading refers to any stock
transaction based on privileged
information about the company
future. This may be illegal if
financial agreements prohibit a
conflict of interest in the trader
behaviour, but some insider trading
activity is authorized and
acceptable. Nonetheless, if you
work for a company and have
some information about its future
activities, you may face an ethical
decision about stock trades based
on this information, regardless of
the legalities.

4.  Many scammers engage in "pump and dump" schemes where
they "pump" the public full of inaccurate information to inflate
the conception of a penny stock. When prices rises based on
this speculation, they then sell their holdings by "dumping" the
shares. Investors who were gullible and bought into the false
rumours are left holding a penny stock that will eventually fall
back to its original price when the market wakes up to these
rumours. To engage in such profits is unethical to some
traders.

5.  Many investors have heard of the "buy low, sell high"
trading strategy. However, to meaningfully profit in a
stock, this order may be reversed. Short sellers first
sell at a high price, and then later buy the stock back at
a lower price. They sell stock initially that they do not
own. This is a common strategy that nearly any
brokerage account may utilize. But it is characterized
by a negative stigma. To short sell in the stock market
is an ethical decision that some will eventually face if
they choose to expand their trading techniques. Part of
the ethical dilemma is the widely-perceived attitude
that short selling causes significant market declines
and even stock market crashes.

6. Unethical
Behavior on
part of the
broker
The Half
Truth
Insufficient
Explanation
Not offering
Alternatives
Discreet
silence

7.  When in Doubt, Spell It Out
If it even occurs to you that an investor may need or want to know
something, tell them. Never succumb to the urge to keep quiet,
even when you know this may cost you the deal.
 Do unto Others
Put yourself in the position of the investor. If you would prefer not to
be handled in a certain way, don't do it to someone else. Above all,
avoid self-deception. The best test is to ask yourself whether you
would want your mother, brother, best friend or indeed yourself to
have these investments.
 Avoid One-Size-Fits-All Approaches
Everyone has different needs, preferences and circumstances.
They therefore need a portfolio that truly caters to them. The
correspondence you send out should also be tailored to each
client..

8.  Ask the Client -Don't Expect Them to Ask You!
A client won't ask for clarification if he or she doesn't realize
it's needed in the first place. Make absolutely sure that the
client knows what he or she is getting.
 Be Specific About the State of the Market
You should discuss the market with your client in general
and with respect to the specific asset classes. This does
not mean attempting to time the market, but the investor
ought to know whether the market has been booming for
years and is regarded as possibly overpriced, or whether
the converse prevails
 Be Open About Monitoring and Control
A client should know how often you will monitor the
investments and what this really means.

9.  Show the Client Visually How Things Work
The classic multi-colour pie chart with asset class
combinations for high, low and medium risk is a great way to
demonstrate the very essence of the investment process.
Likewise, "pyramids of risk" which show how one moves from
a low-risk basis of cash, upward through bonds to equity funds
and so on, should always be the starting point of the advisory
process.
 Explain Brochures
Simply handing your client a pamphlet is not enough. There is
a good chance they will not be understood and they may not
even get read. Go through the main points with clients, so you
can be sure they really understand the main elements of the
investment and what the text means

10. Investment ethics are essentially about two interrelated
things: giving the client good advice, and then making
sure he or she understands it. It is necessary to be
completely frank and open about what you and/or the
providers of the assets can and cannot do. Equally
vital is ensuring that the client is able to see the advice
and products in context - and that context extends to
the markets in question and to the other potential
investments that are available. Over time, good
communication and being totally honest will pay off in
good returns, positive client relationships and word of
mouth recommendations.