Investor protection: What is it?

trading online

Investor protection is a generic term for measures taken to protect small and medium-sized private investors. The aim is to protect them from fraud, misleading offers and overreaching by providers when investing. The principle of investor protection is applied in numerous laws and institutions. 

The market in offers private clients many different options for investing money. Start-ups and medium-sized companies also make use of the grey capital market portfolio. These are common investment opportunities in securities, funds, real estate or precious metals.

In contrast to the "white capital market", which is limited by state financial supervision and other regulations, the grey capital market is subject to fewer restrictions. Nevertheless, all transactions carried out on the grey capital market are legal.

Consumers thus have a good opportunity to invest money at high yields. However, they are overburdened by a multitude of different offers and providers and at the same time less protected, since, for example, there is no uniform supervision. The increased investor protection should therefore make it easier and safer for private investors to invest in the grey capital market.

currency exchange online

What dangers do I face as an investor?

As a rule, private investors need more protection than institutional or professional investors. For example, they do not have the profound knowledge about investment products and providers that professionals do. At the same time, the risks involved in investing in the grey market are significantly higher, which is why increased protection for investors is necessary.

Possible risks are:

  •     Additional costs: At first glance, additional costs are often not apparent with financial products on the grey market. However, private investors may incur losses if they later have to pay high acquisition commissions or fees for management as well as advice.
  •     Opaque offers: Some offers on the grey market may initially promise a very high return, but have a very high risk. Dubious providers often conceal such risks in order to collect as much capital as possible quickly.
  •     Insufficient expertise: Most private investors believe that they are knowledgeable about the financial market. However, they are rarely familiar with all the details of financial and investment products. Thus, they are virtually at the mercy of providers and their statements.

Great dangers can arise from losses that investors make with funds or company participations whose planned profits were to be used for old-age provision. If the invested capital is destroyed without profit, the old-age security is lost and investors are later left with nothing.

According to estimates by the consumer advice centre in NRW, almost 30 billion euros are lost every year through private investments in dubious or high-risk products on the grey market.