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How to Recognize and Avoid Investment Scams
It’s easy to imagine the victims of investment scams are those just starting out but the truth is, even the most experienced investors fall for them. These crimes persist because they work—scammers use techniques that prey upon our trust and our hopes of earning money.
Understanding how these scams work is the first step towards protecting yourself. In this article, we’ll look at the most common types of investment fraud and practical strategies to avoid them.
Although there are different forms of investment fraud, they often share similar characteristics:
- There are guarantees of high returns with little or no risk.
- The seller is not registered or licensed.
- There is a sense of urgency to act now and not research the investment.
- The seller uses vague language or won’t explain how the investment works.
- The offer doesn’t include any paperwork, prospectus or other documents.
- The seller resists your attempt to get out of the investment.
- The offers are unsolicited.
Investment scams come in many forms. Here are some of the most common types:
- Pyramid Schemes-They focus on recruitment rather than legitimate product sales. Participants pay to join and earn money primarily by recruiting new members, not by selling real goods or services.
- Ponzi Schemes-The schemer gathers money from a large group of people to allegedly invest it. However, instead of investing it, the schemer keeps most of it and pays small "dividends" to the earliest joiners out of the funds of later joiners.
- Affinity Fraud-Targets members of identifiable groups, such as ethnic groups or professional associations. Con artists promote investment scams that exploit the trust and friendship in tight-knit groups.
- Pump and Dump Fraud- This manipulation involves artificially inflating (pumping) a stock’s price through false media statements, incorrect news or coordinated buying activity.
- International Investment Fraud- These frauds entice investors with promises of high returns or secret opportunities in foreign markets. The investments are often operated from countries with weak investor protection, making recovery of funds almost impossible.
- Romance Scams-A criminal first fakes a romantic interest in a person. After establishing trust, the scammer invents crises or business opportunities requiring urgent financial help.
Even though scams are all around us, there are steps we can take to greatly reduce the danger of falling prey to them:
- Stay cautious
- Don’t rush
- Avoid secrecy clauses
- Watch for vagueness
- Do your homework
For more information on how to avoid financial investment scams, access the full article here.
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