How to Avoid Investment Fraud
There are a lot of things that you can do to help avoid investment fraud, and a lot of red flags that can signal it, so we’ll take a look at some of those things now:
Tips for Avoiding Investment Fraud
- Ask Questions: Scammers are counting on you to not do your research before deciding to invest. Instead, do some research yourself first. Don’t just ask for more information or references either; scammers don’t have any reason to give you legitimate information. Do your own independent research and get the facts yourself.
- Research Before You Invest: You should never use unsolicited emails, postings to message boards, and company news releases as the only basis for investment decisions. Make sure you know a company’s business and its products prior to investing. Find the company’s financial statements on the SEC’s EDGAR filing system. You can also find many investments by searching EDGAR.
- Know the salesperson: Be sure and spend time checking out the person trying to get you to invest—even if you already know them in a social aspect. Be sure to find out whether the securities salespeople that contact you are licensed to sell securities in your state and whether or not they or their firms have had issues with regulators or other investors. You may also find the disciplinary history of brokers and advisers for free using the SEC’s and FINRA’s online databases.
- Beware of unsolicited offers: Be really careful if you get an unsolicited pitch to invest in a company, or see it praised online, but can’t find any current financial information on it from independent sources. It may be a “pump and dump” scheme. Watch out if someone recommends any foreign or “off-shore” investments. IF something happens, it’s more difficult to find out and to locate money that’s been sent abroad.
- Know what to look for: Get knowledgeable about various types of fraud and red flags that could indicate investment fraud.
Now let’s look at some red flags:
If it sounds too good to be true, it is: Be on lookout for “phantom riches.” Compare any promised yields to current returns on any well-known stock indexes. Any investment opportunity that makes the claim of receiving a lot more could be very risky—and that means you could lose money. Also be wary of claims that an investment will make “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk!” Such things are hallmarks of extreme risk or fraud, plain and simple.
“Guaranteed returns” aren’t: All investing carries some form of risk, which is seen in the rate of return you can expect to get. If your money is perfectly safe, you’ll more than likely receive little back. High returns mean high risks, and may even mean a total loss on investments. Many scammers spend most of their time trying to convince investors that extremely high returns are a sure thing. Don’t believe them.
Beware the “halo” effect: Investors risk being blinded by the “halo” effect when someone comes across as likeable or trustworthy. Credibility can be fabricated, so check out their actual qualifications.
“Everyone is buying it:” Think about whether or not you really should invest in something just because “everyone else is doing it.” Consider whether you’re really interested in the product, and if the presentation focuses on how many others are buying it, this could be a red flag.
Pressure to send money NOW: Scammers often say that what they’re offering is a once-in-a-lifetime deal, and it may be gone tomorrow. Resist any temptation or pressure to invest quickly and be sure to investigate before sending any money.
Reciprocity: Scammers will try to lure investors by offering free investment seminars, thinking that if they do something nice for you, you’ll have to do them a favor and invest in their product. If you attend a seminar, take the materials home with you and do some investigative research before making any financial decisions. Make sure the product is right for you and that you understand everything properly about what you’re buying and the fees associated with it.