We like to believe that we live in a society that is too informed and smart to fall for common scams, but the truth is that investment scams have come a long way from foreign princes and pyramid schemes. While it is true there are more ways to combat scammers now; the fact is investment scams are the third most popular scams in the United States, accounting for $96,844,144 lost by victims in 2017 alone!
The Internet Crime Complaint Center (IC3), the FBI’s cyber-attack and scam investigators, describe investment scams as, “Deceptive practice that induces investors to make purchases on the basis of false information. The scams usually offer the victims large returns with minimal risk.” Here are some of the most common types of investment scams:
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Boiler Room
This is when you receive a cold call from someone pressuring you into investing in “once in a lifetime” stocks or securities. Often, they will mislead investors with stocks that have little regulation and disclosure terms.
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Pyramid Scheme
Also known as Ponzi schemes, this is probably the most famous type of investment scams. Initial investors offer up a certain amount of money and then receive checks based on the number of people they recruit. They are unstable because people often don’t realize they are being paid back parts of their investment and it quickly becomes impossible to recruit new members.
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Pump And Dump
Even though these scams are very illegal, pump and dump schemes are still incredibly popular. This scam is where a group of people buy most, or all of a new, small company’s stock then try to sell it to thousands of others. The initial investors cash in on the stock at the height of investment, causing the remaining stock to crash.
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Offshore Investment
Scammers will try to convince you to send your money overseas with the promise of lowering or even getting rid of your taxes. Not only does this mean you no longer have control of that money, but it also means that you could owe the government back taxes.
Why Do They Work?
Investment scams have been around far longer than the Internet, telephone, or even mail! In fact, investment scams have most likely been around since currency was first minted. Even in our informed society, these scams tend to continue to work because:
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Risk
Naturally, we are afraid to take risks because we run the chance of failure. Scammers know this and use it to their advantage. They will often tell you that there is little to no risk with your investment to make you feel safer about handing over your money.
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Greed
Most of us aspire to do better than our current situation and money is one of the easiest ways to achieve that goal. That is why scammers try to play on our greedy side by promising us riches or “returns” greater than we could ever imagine and why “limited-time” or “one-time-only” offers seem so appealing.
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Trust
No matter the situation, we are more likely to believe someone when they sound like they know about the subject they promote. Investments are no different. If we allow the scammer to gain our trust, it is more likely that they will be able to obtain our money and information, too.
Protect Yourself
Even if you consider yourself at low risk for becoming a victim of investment scams, there are easy steps to take and questions to ask yourself to guarantee you won’t become one of the millions affected by these schemes every year.
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Verify The Investment and Institution
Do some research about the company and investment opportunity before going further with your decision. Any reputable company should have an ample amount of information online. This info can include financial statements, prospectuses, and annual reports.
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Weigh The Risk Vs. Return
Any investment, legitimate or illegal, is a risk. If the return for your investment sounds too good to be true, it probably is.
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Understand The Investment
Make sure to ask questions about your investment so you fully understand the stipulations. Questions can include asking about volatility and liquidity, purchase and maintenance fees, and general questions about the qualifications of the company.
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Take Your Time
Do not let them rush you even if they pressure you into believing that it is a limited-time offer. Investment scammers try to get as many victims as quickly as they can. Legitimate opportunities will allow you to take the time to do your research.
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Speak With An Advisor
If you are unable to determine if it is a scam tactic or opportunity, talk to an advisor. Not only can they help you decide whether you should invest, but they can also help you learn how to invest smartly.
Investment scams are still very present, but by understanding what some of the most popular schemes work, how to spot them, and how to avoid them, you can protect yourself and invest smarter.