Investors should always be on the lookout for investment scams. FINRA issued an alert to warn investors about classic types of investment fraud and to help them spot and avoid the persuasion tactics used by scammers. The following information is taken from that article:
Types of Investment Scams
Investment scams can take many forms, but the most common securities frauds tend to fall into the following general schemes:
- Pyramid schemes – where scammers claim they can turn a small investment into big profits in a short period of time, but in reality, participants earn money solely by recruiting new participants into the program. Pyramid schemes eventually break down when it becomes impossible to recruit new participants.
- Ponzi schemes – where a central scammer collects money from new investors and uses it to pay supposed returns to earlier stage investors instead of investing the money as promised. Ponzi schemes tend to collapse when the scammer is no longer able to attract new investors or when too many investors try to get their money out.
- Pump-and-Dump – When a fraudster deliberately buys shares of a very low-priced stock of a small, low-priced company and then spreads false information to increase interest in the stock and increase the price of the stock. The scammer then dumps his shares at a high price and disappears, leaving many people with worthless shares.
- Advance Fee Scam – These scams typically start with an offer to pay you a temptingly high price for worthless shares in your portfolio. To take the deal, you have to submit a fee upfront to pay for the service, but then you never see your money again.
- Offshore Scams – These scams originate from another country and target US investors. Offshore scams can take a variety of forms, including those listed above. Unfortunately, whatever form a scam takes abroad, it can be difficult for US law enforcement agencies to investigate the fraud or rectify the harm to investors when the scammer is acting from outside the country. .
Red flags of fraud
To avoid falling for a scam, look for these warning signs:
- Guarantees: Be wary of anyone who guarantees that an investment will be performed in a certain way.
- Unregistered Products – Many investment scams involve unlicensed individuals selling unregistered securities.
- Overly Consistent Returns: Any investment that consistently climbs month-over-month, or provides remarkably consistent returns regardless of market conditions, should raise suspicions. Even the most stable investments have setbacks from time to time.
- Complex Strategies: Legitimate professionals need to be able to clearly explain what they are doing. It is critical that you understand any investment you are considering.
- Missing Documentation – If someone tries to sell you a security without documentation, they may be selling unregistered securities.
- Account Discrepancies: Monitor your account statements to ensure account activity is consistent with your instructions and make sure you know who has your assets. Fraud can more easily occur if the adviser is the custodian of the assets and the keeper of the accounts.
- A Pushy Salesperson: No reputable investment professional should pressure you into an immediate investment decision or tell you to “act now.”
If you can identify the warning signs of investment fraud and know some of the most common types, you’ll be better equipped to avoid these types of scams and protect your financial future.