How to Spot an Investment Scam
Investing is often touted as a good way to build wealth over time. However, for beginners, trying to figure out the best places and ways to invest money can feel like a daunting task — especially with all the investment schemes out there.
Before you part with your hard-earned cash, make sure you aren’t falling victim to an investment scam. Here’s what you need to know.
Signs It Might Be an Investment Scam
There are definitely red flags when it comes to identifying an investment scheme. Before you invest, understand the common features associated with scams, as well as the strategies fraudsters use to get you on board.
Common features associated with an investment scam
Guarantee returns
Most investment schemes promise guaranteed returns. The reality, though, is that investing comes with a certain level of risk. There are no guaranteed returns, even for investments generally considered “safe.”
Get in on the ground floor
If you hear that you’ll “get in on the ground floor,” able to scale up your interest in the investment later or take gain some special advantage, that’s a sign that you might be looking at an investment scheme. Most reputable investments are accessible later.
Exclusive organization
You might be flattered to be part of a select group of people offered the “opportunity.” While there are legitimate investment clubs, they have specific rules and thresholds. An investment scam, on the other hand, doesn’t offer a high barrier to entry, all while insisting that it’s exclusive.
Penny stocks
Low-cost stocks with high volatility are often used in investment schemes. These stocks are not traded on major exchanges and don’t always meet regulatory standards. While penny stocks may work for some expert investors, beginners should steer clear of them.
Claims to be the future of technology, society, or medicine
If the investment scheme centers around convincing you that something is about to take off and change the face of the world, it could be a scheme. Even if the asset is legitimate, the scam isn’t. Be wary of low-cost cryptocurrency tokens, biotech penny stocks on the verge of a miracle cure, or other technologies designed to “disrupt” society.
Common Strategies by Investment Scammers
| Strategy | How It Works |
|---|---|
| Vague details | If you don’t get many details or a clear explanation of how and why the investment works, it could be an investment scheme. |
| Cold approach | You might be aggressively pursued via email, text, or phone. Some scammers are also insistent in person. |
| Scarcity | One of the oldest sales tactics is to claim that the opportunity is limited. Scammers use the scarcity strategy to convince you that you don’t have a chance if you don’t hurry up because the “opportunity” is only available for a short period of time or to a small number of people. |
| Pressure to make a fast decision | An investment scheme usually comes with high-pressure tactics to encourage you to make a quick choice. If you had time to mull it over, chances are that you’d decide against it, so hard-sell tactics are used to insist on a snap decision. |
| Use of complex jargon | Investment scammers often make something seem complicated. They use jargon to make you feel like you’re not “in the know” so you’ll trust them to make the decisions for you. |
How to Protect Yourself and Your Money from Investment Scams
If you want to avoid being caught up in a shady investment scheme, there are a few things you can do to protect yourself:
- Check credentials: Don’t take someone’s word for it — double-check to see if they’re an investment professional. You can use BrokerCheck to find out if someone is a registered professional, as well as review complaints and disciplinary actions.
- Get a second opinion: Talk to someone who you know you can trust, especially a lawyer, accountant, or another financial professional. See how they feel about the opportunity and if they see any red flags.
- Require documentation: Legitimate, publicly available investments have documents, such as a prospectus or offering circular. Fraudsters usually go away if you insist on seeing documentation of the results, as well as disclosure of risks.
- Don’t make snap decisions: Create a waiting period for yourself. Don’t rush into something as important and expensive as an investment.
- Say no: It can be hard to say no, especially if the investment scam is related to your social group or if the fraudster appears to be doing you a favor. However, your best protection is to walk away from the conversation, ignore the email, or block the phone number. You don’t have to feel obligated to participate.
What if You Fall Victim to an Investment Scam?
Even the most vigilant and savvy people can become a victim of an investment scam. There’s no shame in being duped. The tactics used are always evolving, and it can be hard to know what’s a legitimate investment and what’s an investment scheme.
If you’ve been the victim of an investment scam, here are some things you can do:
Understand your rights
Get information from the Department of Justice about your rights as a victim of financial fraud. You can also check with your state’s Attorney General to find out what resources are available. You can find out how to contact your Attorney General’s office through the National Association of Attorneys General.
Document your process
Make sure you have information about the situation, a timeline of events, and any other documentation related to the fraud, including sales pitches and the names and dates of people you talked to.
Report the fraud
The Financial Industry Regulatory Authority (FINRA) has online resources designed to help you report fraud. You can also file a complaint with the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), and your local law enforcement officials.
Consider civil action
You might also be able to file in small claims court, ask for dispute resolution, or take other action. Check with your state to find out what remedies are available. You can also contact FINRA for more information about their dispute process.
Follow up
Don’t forget to follow up by keeping tabs on your credit report, in case your information has been compromised, and to check the status of any case you’ve filed.
In the end, the best protection is your gut. If it sounds too good to be true, it probably is.
