We all eventually make a money mistake or two…or three. But there’s a big difference between overpaying for vacation fun and having your nest egg wrecked by an investment con artist.
Even really smart investors can be duped by investment scams. And if you’ve fallen for a scam, it’s typically hard to get your money back. Government agencies estimate that financial fraud costs American consumers $40-50 billion every year.
That’s why October 1 to 7 marks World Investor Week – to help arm consumers with tools to invest wisely and avoid fraud. Even if you can’t attend one of many events this week, here are some actions to be a careful investor:
- Avoid! Ignore salesmen who say something like, “you can get rich quick on this” or “it’s a sure bet” or “you can only get in today.“
- Understand! Don’t invest in something you don’t understand.
- Research! Hot tips are no substitute for researching an investment yourself.
- Verify! Before you let someone have your money to invest, find out if he/she is a licensed investment professional. Use BrokerCheck or call your State Securities Administrator on this list.
- Know your risk! All investments have a risk. Usually the greater the reward or return, the greater the risk.
- Learn the lingo! Having a grasp of key financial terms can help you understand an investment product.
- Ask about fees! Even legitimate investments can carry high fees, but legitimate advisors/brokers will tell you what those fees are.
Types of Cons
Investors can also learn to recognize basic types of investment scams:
- Affinity frauds – Members of a group are conned by one of their own group members. This often goes unreported because the con has been a friend.
- Advance-fee frauds – Someone asks you for upfront money so the deal can go through (like a “Nigerian official” or “send money to be eligible for…“).
- Ponzi schemes – Initial investors are paid from funds put in by later investors. This scheme is typically touted as high yield, low risk.
- Pyramid schemes – Investors make money by getting new recruits to buy in; closely related to Ponzi schemes.
- Promissory notes – Investors loan money in exchange for fixed income payments.
- Pre-IPO investment scams – Someone offers to sell unregulated securities they may not own or are fake.
- Pump-and-dump scams – First someone tries to boost a stock’s price with fake info or stories, then sells his/her own holdings when the price rises.
- Private offerings – Many of these unregulated, limited investment offerings lack transparency and liquidity. Buyer beware!
- Distressed real estate schemes – Foreclosures, short sales or highly leveraged real estate touted as favorable.
- Oil and gas drilling programs – Promises of lucrative returns and high pressure sales tactics hides the high risk.
- Proxy trading accounts – Someone offers to set up an account in your name and trade for you.
Scam Artists Read Headlines Too
New investments and financial innovations constantly open the door for new scams, so investors need to be diligent. Beware of investing on crowdfunding sites or in new products like digital currency when you don’t understand how you will make – or lose – money.
The bottom line….if an investment sounds too good to be true, it probably is.
World Investor Week is coordinated by the U.S. Securities and Exchange Commission and is supported by organizations on six continents. Check here to see event locations.