FOOL SCHOOL
Online Brokers & Security

July 3, 2002

While there are plenty of benefits to trading online, there are also some concerns, particularly in the light of some of the horror stories that have surfaced in the past. So, let's get up close and personal and confront these issues.

There are two main aspects to security on the Internet. One of them involves what your broker does at his end, and the other involves what you do at your end.

The broker end

At the broker end, there is encryption software, which ensures that any information that is passed between you and him is scrambled. Only someone with special decryption software and a unique key code would be able to unscramble the information and look at your account.

It's true that in the banking industry, there has been the odd cock-up when Princess Leia suddenly found herself looking at Obi-Wan's account instead of her own, but these technical glitches are not only rare, they're invariably the bank's fault. It means they would be liable for any losses you might sustain as a result of their negligence. And hackers are far more likely to try and sabotage the broker's website than your own personal account. (If you want more technical information about how encryption works, by the way, then have a look here.)

Brokers have reputations to maintain, not to mention money to make! And since online broking is extremely cost-effective for them, they are very keen to make sure it works.

They are also subjected to pretty stringent rules by two organisations (with very long names) that currently oversee their operating procedures. As it happens, responsibility for all financial services in the UK is currently being transferred to the Financial Services Authority (FSA), which seems extremely keen to ensure the consumer is protected from management cock-ups. We also have the benefit of the FSA's Investors Compensation Scheme, which is designed to cover incidents of professional negligence, fraud and theft, and brokers themselves usually carry some form of insurance.

Your end

At your end, your responsibility is simple. Never, ever reveal your ID or password to anyone. And don't walk away from your computer while you're in the secure area of your broker's website. As long as you are careful and keep to your side of the bargain, your broker has to take responsibility for anything that goes wrong at their end.

The fact is your Internet brokerage account is much less vulnerable to fraud than your credit card is when you buy something over the phone. And have you ever thrown away a petrol receipt that happens to detail all the important bits of your debit card? Or bought a book or a CD over the Internet? Well then!

The other concern, of course, is that computer systems can crash. Either yours or theirs. You may worry that you won't be able to get online at the crucial moment. This may well happen occasionally, but don't forget there's still the old-fangled telephone for the odd emergency should one crop up.

Finally, some sensible precautions:

• Never reveal your ID or password to anyone
• Make sure your broker has a telephone back-up service in case your -- or their -- computer system crashes
• Never reveal your ID or password to anyone
• Always print off evidence of your instructions when you trade
• Never reveal your ID or password to anyone
• Ensure that your broker carries insurance protection
• You know what I'm going to say, don't you?

The very existence of the computer, in the home and at work, makes the growth of online trading inevitable. So you might as well join the rest of us and get stuck in!

More: The Fool's Broker Centre