Scams are an unfortunately common part of the financial world. There are plenty of people and groups out there who are keen to trick companies and individuals out of their hard-earned income. Every year, thousands of people fall victim to investment fraud, making it critical to know how to identify and avoid investment scams. Having the ability to differentiate between scams and legitimate opportunities could be the key to protecting your cash and improving your livelihood long-term.
Common Investment Scams
There are various types of investment scams to watch out for today. Some of the most common scams you may have already heard of, like pyramid schemes and Ponzi schemes. Others are lesser-known but just as dangerous. Here’s a list of scams to avoid:
1. Pyramid and Ponzi Schemes
Pyramid schemes are perhaps the most well-known kind of investment scam. They promise access to high returns within a short time frame, often require extraordinarily little effort from you. Pyramid scams rely on your ability to invest money and then recruit other new investors to spend their cash on the same idea.
Some pyramid schemes are exceedingly difficult to recognize today because companies can invest a lot of time and money into making their opportunities look legitimate.
Ponzi schemes are an alternative pyramid scheme that function by stealing money from new investors to pay earlier investors, often until the entire scheme implodes. The name comes from the man, Charles Ponzi, responsible for tricking many people into his own Ponzi scheme in the 1920s.
2. Internet Investment Fraud
The internet is a powerful tool for investors. It can help you to find information about investment opportunities. The web even comes with access to brokerage companies that allow you to place trades and change positions with your securities online.
Criminals, unfortunately, also know how to use the internet, and they often do it to manipulate what investors might read about a company or opportunity. People responsible for internet investment fraud may manipulate the information on websites and social media to convince you that something is a good purchasing opportunity.
Internet fraud often leads to “pump and dump” schemes or market manipulation. This is when someone buys shares of low-priced stocks and spreads false information to increase the stock’s price before selling.
3. Offshore Scams
Offshore scams are investment schemes that target people in the US from other countries. These scams can come in various shapes and often include something called “Regulation S.” This is a rule exempting US companies from registering their investments with the US Securities and Exchange Commission (SEC) because they’re sold outside of the US to foreign investors.
Fraudsters often attempt to resell Regulation S stock to American investors, which is against the rules of the Security and Exchange Commission (SEC).
4. Promissory Notes and Advanced Fee Fraud
Promissory notes are a kind of loan agreement, with very few details attached to them. In this kind of scam, investors often agree to loan money to a business for a specific time. The company promises a fixed return on that investment.
Some promissory notes are legitimate investment opportunities; however, many can turn out to be worthless and expensive. Most valid notes will need to be registered with the SEC, so you should always check to ensure your note is legitimate.
A similar scam to Promissory Notes is “Advanced Fee Fraud,” which involves an investor spending money to help push a deal through. The investor spends to receive something of greater value but often ends up with nothing.
Tips to Avoid Investment Scams
- If it’s too good to be true, it usually is: If someone promises you a huge return on investment for minimal input from you, then it’s a good chance you’re being sold a scam. Fraudsters often try to entice people by promising them the world in exchange for extraordinarily little effort. Most true investments can’t promise a certain outcome.
- Check the registration: Always check the company’s registration offering the investment opportunity with the Federal Trade Commission or Security and Exchange Commission. Companies must register with these groups and release financial statements so you can check them out before spending your money.
- Do your own research: Never decide about an investment opportunity based on a “hot tip” that someone sends you on social media or through your email account. If someone messages you about an investment, make sure you do your own research before spending anything.
- Ask questions: Don’t be afraid to ask questions and get straight answers about the opportunity. Dig around for all the information you can get and make sure that you feel confident before you spend anything.
- Say no to free stuff: Sometimes a scammer will lure their victim in by offering something free to go with their investment product. This can make you feel you’re being cared for and trust the company’s pitch. However, it’s best to not make investment decisions based on the free stuff associated with an investment. Nowadays it’s not hard for scammers to develop a convincing façade.
Don’t become another investment scam victim. Carefully evaluate your investing options and seek impartial advice. Also, it’s better to find a financial coach to learn about different schemes than jumping on the inside information posted on forums and social networks. Sometimes legitimate opportunities offer a high ROI on a small amount too, but no matter what, you still have to ensure you do adequate research on the offerings.