Tips to Avoid Being Scammed While Investing

investment tips



Possibly the most famous scam, Ponzi scams involve a primary con-artist who collects funds from fresh investors and uses it to pay dividends to earlier investors. Ponzi schemes fail when the thief at the center of the scam no longer can draw fresh investors or if too many investors try to get their funds out.


Pump and Dump

In Pump and Dump, the fraudster acquires shares of a low-priced commodity and then spreads disinformation to pump up interest and increase the stock’s value. Thinking they are getting a great opportunity on an encouraging stock, investors generate a demand at greater costs. The con-artist then dumps the commodity at the elevated value and leaves as many investors are left with useless shares of stock.


Advance Fee Fraud

The Advance Fee Fraud works on an investor’s naive goal of being able to nullify a premature investment mistake. The scam normally starts with a proposition to pay the investor a large amount for a worthless stock. To close the deal, the investor must transfer a fee in advance to repay for the help. Once the fee is sent, the money is never seen again.


Offshore Scams

Offshore scams originate in a foreign country and mark American investors. Offshore cons take various forms including the three already mentioned. Many offshore scams include “Regulation S,” a law that excuses American businesses from listing securities with the SEC. Fraudsters manipulate the offerings by reselling Reg S stock to American investors in breach of the law.


Scam Psychology

The thread that connects the various kinds of investment frauds is the applied-psychology used in the fraudster’s pitch. If you ever heard your parents say, “If it sounds too good to be true, it probably is,” you can stop reading. If you’ve never been blessed with that bit of advice, please continue.

The trick in avoiding being scammed is knowing when “good” becomes “too good.” There’s no line in the sand and cons make their living making sure the paper they peddle sound both good and true.


Common Tactics


Once a fraudster has sent you his pitch and you’ve responded, he’ll start dangling the bait by looking for an Achilles heel by probing with what look to be, harmless questions about your well-being, family, political views or prior employers.

Once they know your hot buttons, the potential investor will be bombarded with a stream of tactics that can leave even the most seasoned investor wandering in a fog. Some of the more common tactics include:


  • The Phantom Riches

Holding out the promise of money, the fraudster promises the investor something they desire but can’t obtain. “These gas wells are guaranteed to generate $7,000 a month in income.”


  • Source Credibility

The scammer tries to build up plausibility by pretending to be with a known, reliable firm or having special expertise. “Believe me, as a senior VP with ABC, Inc., I would never market an investment that won’t perform.”


  • Reciprocity

This tactic offers to do a minute service for the investor in exchange for some big help.  “I’ll give you a break on my fee if you buy now — half off.”


  • Social Consensus

Here, the investor is led to believe that other investors have already invested. It’s especially effective when the fraudster mentions people in your social circle and claims they have already invested.


  • Scarcity

By building a fake feeling of necessity, the scammer plays on the investor’s fear of loss. “There are only two left, so I’d contract today if I were you.”


Who Are the Victims?office-620822_640


Anybody who buys stocks is a possible mark for investment fraud. There are some things an investor can do to limit vulnerability. It is just knowing what to defend against.

FINRA Foundation studied how known fraud victims differ from non-victims.

They identified five risk factors, such as:


  1. Owning high-risk investments including penny stocks, options or shares in international currency;
  2. Over dependency on friends, family and co-workers for guidance.
  3. Attending a free investment seminar.  The study revealed that three times as many marks went to such a seminar as did non-victims.
  4. Failure to investigate the qualifications of an investment expert, and
  5. An incapacity to spot influencing tactics used by scammers..


FINRA has an online Risk Meter, which can be used to assess the presence of characteristics and traits that have shown to make some investors particularly vulnerable to fraud. How to Protect Against Investment Fraud.  Besides being aware of the types of fraud as well as some of the tactics, it is vital that you ask inquiries about investment possibilities and the people who pitch them. Then, verify the answers they provide.


Here’s how:


  • Check Them Out


Always ask if the promoter is authorized to sell the venture. Confirm the identity of the regulator that issued the license as well as the history of the license — has it ever been withdrawn or rejected.

A genuine securities seller must be properly licensed, and their firm must be listed with FINRA.

Verify the seller’s answers to your query by calling FINRA Broker Check at 800-289-9999. BrokerCheck enables you to verify not only registration and licensing, but also any history of complaints.

Be sure to call the state securities regulator as well. That number can be found in the government section of the local phonebook.

If you believe you have been defrauded or treated unfairly by a securities professional, contact the Securities and Exchange Commission.  A lawyer in your community, experienced with investment law, can also provide advice on how to proceed.