Investing your hard-earned money is a common practice to help build a solid financial future. However, when money is involved, scams are usually not far away. An investment scheme can entice people to invest their money into a program touted as offering a high return with little work. In reality, only scam artists benefit from investment scams, while legitimate investors lose the finances they’ve worked so hard to build.
Investment scams, also known as investment fraud, encourage people to invest money into something that is unlikely to offer a return. Investment scams have become more sophisticated with modern technology, as a con artist can now hide behind social media, emails, and websites to conceal their scheme.
The federal and state governments work to stop investment scams. For example, the U.S. Securities and Exchange Commission and the Federal Trade Commission allow consumers to file complaints when they are presented with or fall victim to an investment scam. State Attorney General offices and local law enforcement agencies also work with consumers to protect them against scams.
However, the best line of defense to prevent investor fraud is investor education. Understanding what to look for in a potential investment scam can be an important measure to thwart an investment scammer from tapping into your hard-earned finances.
Types of Investment Scams
Investment scams come in a broad variety of setups, sometimes cloaked as a seemingly legitimate investment opportunity. Investment fraud scams often have a few similarities to methods con artists use for roping in consumers, including:
- Promising large sums of money to be made quickly
- Super simple investment strategies with small investments and large gains
- Requiring that investors get other people to invest in the opportunity, too, to make more money
- Unsolicited offers for financial advice or investment advice
- Requiring personal information or financial information to set up an account without being able to view all the details
- Using pressure tactics to complete sales quickly
- Promising a lot without tangible evidence of how the person or company delivers on those promises
- Offering a guaranteed return on your investment
The most common investment scam types are those that fraudsters use most frequently, often preying on vulnerable populations, like the elderly or young people just starting to navigate the world on their own, like those freshly graduated from college.
A Ponzi scheme is named after its original creator, Charles Ponzi. These investment scams pull people in as “investors,” although they don’t offer anything tangible to invest in. Instead, as the scheme draws in more money, the people who started it continue making the majority of the money, while the “investors” often walk away with little to no gains.
Unlike legitimate investment strategies, a Ponzi scheme doesn’t generate earnings from actual business activities. Instead, it relies on the funds from newer participants to pay returns to earlier participants.
This creates an illusion of a profitable business. As long as new participants continue to join and pump money into the scheme, the scam can sustain itself. However, the moment the inflow of new money slows or stops, the scheme collapses. Those who join early might make a profit, but those who enter the scheme later usually suffer significant financial losses. The organizers of the scheme, like Charles Ponzi himself, often benefit the most, leaving countless participants in financial distress.
A forex trading scam is touted as a foreign portfolio investment where investors can buy and sell money in different currencies with the goal of making a profit. Although the forex market can be a good investment for some, it’s also a common place to find investment scams targeting people who want to make quick cash.
Forex trading requires high-level knowledge of the market and different currencies. Forex investment scams typically claim that anyone can learn to make easy money with forex trading, which is simply not true. These scams are masterfully crafted to appear legitimate. They may offer seminars, training programs, and sophisticated-looking software, all promising to unlock the secrets of forex trading success. Unsuspecting individuals are drawn in by flashy marketing and promises of significant profits.
However, what these scams conveniently leave out is that forex trading is complex and fraught with risks, influenced by geopolitical events, interest rates, and economic indicators. Scams often exaggerate potential returns and minimize risks, luring investors with “guaranteed” strategies or tools. Many fall for these traps, losing investments due to misleading information.
Real estate investment scams involve investing in a property – usually in the form of shares – with a guaranteed high return for investors. They often are attached to the term passive income, meaning that someone can invest, do nothing, and still get a return on their investment. In many cases, scammers rope people into investing in properties that don’t exist or aren’t on the market.
With real estate investment scams, the properties being pitched for investment might not even exist. Or, they might exist but aren’t up for sale or investment. Scammers can use fake photos, false documents, and other misleading information to make it seem as if the investment is legitimate. As potential investors are shown these “opportunities,” they are led to believe they’re making a wise investment choice.
However, once the money is handed over, the scammer may disappear, or the returns never materialize as promised. As a result, investors can lose significant amounts of money.
Pyramid schemes are similar to Ponzi schemes in that they rely on participants recruiting more participants to be successful. However, in a pyramid scheme, it’s usually the participants who are encouraged to recruit more participants to get their biggest payouts.
A pyramid scheme might convince one person to invest $1,000 by telling them that, for each additional person they recruit, they stand to earn up to $500. However, the majority of recruits won’t participate as expected, so their recruiters don’t end up earning the amount they’d hoped.
At its core, a pyramid scheme is essentially a game of numbers and promises. The premise is simple: the more people you recruit under you, the more money you stand to make.
However, pyramid schemes have an inherent flaw. The need for continual recruitment means that eventually, the market becomes saturated, and it’s increasingly challenging to find new participants. As the structure grows, those at the bottom levels struggle to recruit enough people to see any substantial returns. They often end up with losses, having paid more in their initial investment than they ever recoup. As the scheme crumbles, only those at the top walk away with substantial earnings, leaving the majority of participants at a significant financial disadvantage.
Cryptocurrency investing has become extremely popular in recent years, and scammers have used its popularity to target new investors looking for a way to make money. These investment scams usually convince people to invest in fraudulent cryptocurrency, promising a significant return on their investment in a short period.
They create compelling marketing materials, sometimes even fake testimonials or endorsements, to give credibility to their claims. Potential investors, believing they’ve found a golden opportunity, might pour their savings into these “promising” digital currencies.
However, once the money is invested, several outcomes might occur: the scammer disappears, the supposed cryptocurrency turns out to be worthless, or there’s no actual way to cash out the investment. As a result, many investors face significant financial losses.
Pump and dump investment scams encourage large groups of people to buy shares of a specific stock, in turn driving up the value of that stock. Scammers use several techniques to get others to believe that the stock is an excellent investment, sometimes even creating articles and advertisements to make their claim seem more believable. They might craft fabricated news articles, fake analyst reports, or testimonials heralding the stock as the next big thing. The goal is to make their promotion seem legitimate, causing a buying frenzy.
Once the stock price is up, the fraudsters sell their shares for a profit. However, other investors are often left losing money because share prices typically fall significantly with the sale of numerous shares.
As more and more investors buy into the hype, the stock’s price surges – this is the “pump.” Once the stock reaches its peak, the scammer, who typically has a significant stake from the start, sells or “dumps” their shares at this high price. The sudden sale usually triggers a cascade, causing the stock’s value to plummet. This leaves the majority of investors, who were lured in by the false promise of a golden opportunity, with worthless shares and significant losses.
A high yield investment scam is usually cloaked as a program needing investments. It is presented as a promising financial opportunity for investors who are drawn to the potential of substantial returns. Disguised as a legitimate investment program, the true nature of the venture remains vague. Details about the program’s operations, the background of the company, or the strategies they employ to achieve such high returns are typically missing or suspiciously ambiguous.
Scammers go to great lengths to make these high-yield scams seem credible. They invest in designing professional-looking websites or landing pages that project an image of authenticity. These sites might showcase glowing testimonials, often fabricated, from “satisfied investors” who claim to have benefited from the program. Alongside, aggressive marketing tactics, including targeted online advertisements, are used to direct potential victims to these web pages.
Once on the site, the emphasis is usually on the urgency to invest before the “limited slots” run out or before the “exclusive opportunity” expires. The aim is to push individuals to act quickly, often discouraging them from conducting due diligence.
How To Avoid Investment Scams in 2023
Learn how to avoid investment scams to protect your personal finances from scammers looking to earn a quick buck. Here’s what to watch for and what to do to prevent yourself from becoming a victim of financial fraud.
Many scams target people already looking to become potential investors. However, if you haven’t filled out forms or requested information about an investment opportunity, you shouldn’t be receiving information about an investment. These unsolicited offers, which usually happen by phone or email, are often sure signs of a scam.
If you do receive an offer you think you might be interested in, ask for more information. The person should be able to provide details about their company and the offer, including what exactly you’re investing in. Never accept an unsolicited offer without further research.
Researching potential investment opportunities is key to ensuring their legitimacy. You can start by visiting the website of a company or person you’re considering working with for an investment. Does the website have contact information, including a physical address and phone number? Does it have security elements, like two-step verification for an account login and an SSL certificate?
If the company or person passes the website and contact information test, ask for documentation proving what they claim, like case studies of clients they’ve worked with or a prospectus detailing their stocks or ETFs.
When in doubt, use the EDGAR database, which is maintained by the U.S. Securities and Exchange Commission, to search for legitimate investment companies and investments.
Giving away your personal or financial information to a person or company should only be done securely. Again, ensuring that you use a secure website is key.
Never give your bank account numbers or credit card numbers over the phone for a potential investment opportunity. Legitimate investment companies usually have you sign documents and explain the entire process to you before you hand over any money. Never share your login username or password with anyone.
A financial advisor can point you toward the best investment decision for your goals and can take on most of the legwork of finding legitimate investment opportunities. If you’re serious about investing, look for a financial advisor in your area. Get recommendations from friends and family to find someone you can trust.
State Attorney General offices help protect consumers from scams and fraud. If you believe you’ve been involved in investment scams, contact your state’s office to report the scam. Give as many details as possible, like all contact information you have and copies of any written exchanges between you and the person or company, so that the office can investigate.
You can also file a complaint with the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, and Financial Industry Regulatory Authority. Your local law enforcement agency may also be able to help if the investment scam happened within its jurisdiction; if not, the office can point you to the correct agency to contact.
Finally, protect any accounts that may have been compromised by scammers. For example, if you gave your bank account numbers, contact your bank to see if it can put a temporary hold on your account and watch for suspicious activity.