Every year, thousands of people lose millions of dollars to investment fraud. Fortunately, investing with a healthy dose of skepticism and watching for these expected “red flags” can help you avoid deception.
Fraudsters often promote investments to specific groups of investors, like ethnic or religious communities. This type of investment scam is known as affinity fraud.
They Don’t Have a License
Often, investment fraud involves brokers without the proper licenses to sell securities. This is a red flag to watch when evaluating potential investments, as all reputable financial and investing professionals must have a license to practice in their fields.
Similarly, be suspicious of anyone who claims to have extensive experience in a particular field. Fraudsters often make up credentials or fabricate industry experience to appear legitimate. You can check a promoter’s background by asking for references or conducting an online search.
Con artists use a variety of influence tactics, including phantom riches, source credibility, social consensus, reciprocity, and scarcity. If you see any of these tactics used, it’s essential to report the situation to authorities.
They’re Selling Unregistered Securities
Stock fraud describes securities fraud or investment fraud and dishonest activities in the stock or securities markets that aim to deceive or manipulate investors for monetary benefit. So, what is stock fraud? This type of fraud undermines the integrity of financial markets, erodes investor confidence, and can lead to substantial financial losses for individuals and institutions. Stock fraud can take various forms, involving false information, misrepresentations, or other unethical tactics.
Suppose a financial advisor promotes or sells assets without registering them with the U.S. authorities. In that case, you should be suspicious of fraud—either a state securities regulator or the Securities and Exchange Commission (SEC). You can check the registration of individuals and firms with the SEC’s National Registration Search (NRS) or by contacting your local securities regulator.
Many investment scams involve securities that have not been registered with the SEC, which are known as unregistered securities. These can include shares of small, low-priced companies that are often called microcap stocks. These stocks can be challenging to find information about and may be more complicated to sell than more extensive stocks.
Swindlers use a variety of techniques to market their unregistered securities. They may promise incredibly high returns with little or no risk and claim to have inside information that others are unaware of.
It’s critical to keep in mind that there is some risk associated with any investment. Be suspicious if someone promotes an investment with unrealistically high returns or low risk. Even if an investment seems legitimate, watch out for unusual trading activity or discrepancies on your account statements.
They’re Pressured to Make a Decision
As the idiom goes, “If it sounds too good to be true, it probably is.” Any investment inherently has some level of risk. Fraudsters often lure people in with promises of high returns with little risk.
Pump-and-dump fraud involves spreading false information to increase the price of a thinly traded stock artificially, then selling that stock quickly to rake in profits. This is a form of insider trading and is illegal.
Community-based investment fraud (aka affinity fraud) involves targeting members of a specific group, such as age, ethnicity, religion, military service, or sexual orientation, and taking advantage of the trust and friendships within that group. Fraudsters may spread false information through social media to solicit potential investors and enlist group leaders to promote the scam.
Always be skeptical of new posts, tweets, or direct messages on your social media accounts that promote a particular stock. Be particularly vigilant if the communications are sent from an account or profile that appears to be a broker, investment adviser, or other source of market information, and note any slight variations in spelling or pronunciation to identify imposters.
They’re Guaranteeing a Certain Return
Red flags can be identified in investing by examining data and economic indicators. They may also be spotted in financial statements compiled by companies, investors, and analysts. Gaining a solid understanding of how to read and interpret these documents is essential for investment success.
Any promises of a high return with little or no risk should raise suspicions. All investments carry some amount of risk. Suppose an investment offers a much higher rate of return than similar investments. In that case, it is likely because the company is using those profits to pay dividends rather than reinvesting into the business and its growth.
Also, be wary of anyone who pressures you to decide or wants access to your account information and computer. Giving out this type of information can lead to fraud and identity theft. Also, watch out for discrepancies in your account statements, as they may signify churning and fraud. An excellent way to prevent these scams is to learn more about investing before committing to any investments.
They’re Using Phony Numbers
Investment fraud can come in many forms. It’s essential always to be suspicious of anyone who claims a high rate of return with little or no risk. Also, be wary of anyone who says they’ll help you recover losses in exchange for an advance fee. These advance fees are sometimes disguised as taxes, deposits, or refundable insurance bonds.
Another common trick fraudsters use is using fake seals from state and federal regulators to make a scam look legitimate. They can also “spoof” phone numbers so that your caller ID displays a TV station or doctor’s office instead of the person calling.
Every year, thousands of people lose millions in investment fraud. Maintaining a healthy dose of skepticism and learning about common red flags can protect you from falling victim to financial abuse and fraud.
