7 Ways To Recognize an Investment Scam
Written by
Angela Corry
Edited by
Amber Barkley
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All investments carry some degree of risk, but there’s a distinct line between a risky investment and a downright scam. Unfortunately, scams are prevalent. According to data from the Federal Trade Commission, consumers lost more than $8 billion to fraud in 2022. If you’re someone who actively invests or is interested in getting started, it’s important to be able to differentiate between legitimate investments and investment scams.
Check out the advice and expert insight below on how to keep an eye out for investment scams.
Common Types of Investment Scams
While all investment scams aim to trick you into giving away your money, they don’t all work in the same way. There are, unfortunately, many variations of investment scams. It helps to know some of the more common types of investment fraud, so you know what to look out for.
Here are a few common types of investment scams:
- Real estate fraud: There are a variety of real estate scams, including mortgage scams, rental scams, loan-flipping scams and more. This type of fraud often involves scammers posing as qualified real estate or lending professionals.
- Cryptocurrency fraud: “Cryptocurrency scams are common, because there is a lot of curiosity around it but very little education,” said Brittany Allen, fraud prevention expert and trust and safety architect at Sift. Scammers may demand cryptocurrency as payment in advance, make guarantees of massive profits or even offer unsolicited advice about cryptocurrency investing through dating apps or sites.
- Fake investment seminars: These are seminars where someone makes you a small offering — like a free lunch — before trying to sell you on an investment. They use reciprocity as a tactic to make you more likely to buy.
- Pyramid schemes: Pyramid schemes involve scammers recruiting new investors to sell a fake or misrepresented product or service. But the real emphasis is on recruiting new members, which is how investors make money. Eventually, there aren’t enough new recruits buying into the program, and the pyramid collapses.
- Pump and dump schemes: These schemes involve fraudsters sharing fabricated information about a company in hopes of boosting the price of the stock. “Once the price is higher, they sell their shares or [cryptocurrency] coins, causing the price to plummet and leaving all other investors with significant losses,” Allen explained. Look for these scams in online forums and chat rooms.
While these are some of the common types of investment schemes, scammers have plenty of tactics. Keep track of recent investment scams by checking out the U.S. Securities and Exchange Commission’s (SEC) Investor Alerts.
How To Recognize an Investment Scam
Spotting a scam before it’s too late can save you valuable time, stress and money. Keep your eye out for these seven red flags that likely signal an investment scam:
1. Guarantees
“If someone tries to convince you that an investment is ‘guaranteed to earn high returns,’ it’s a scam,” said Stephanie Genkin, certified financial planner and founder of My Financial Planner, LLC, a New York-based Registered Investment Advisor. The truth is, there are no guarantees with investing, and no one can predict the future.
2. Limited-Time Offers
According to Genkin, consumers can avoid scams by “exercising caution around high-pressure sales.” If you feel pressured to buy an investment right away, don’t. Scammers use this tactic to get your money before you have time to properly research an investment.
3. Opportunities That Are Too Good To Be True
“The common advice, ‘if it’s too good to be true, it probably is’ applies to investments,” Allen said. “Offering unrealistic results, such as outsized returns, a very short investment window, or zero risk” is a big red flag.
4. ‘Inside’ Information
Scammers may try to lure you in with the promise of “inside” information. If someone claims to be able to predict an investment’s performance, steer clear.
5. Unsolicited Investment Advice
If someone approaches you — via email, telephone, social media or any other method — and tries to offer you investment advice, don’t take it. Legitimate businesses and brokers wouldn’t give unsolicited investment advice, so it’s likely a scam.
6. Unregistered Investment Products
Don’t invest in products that aren’t registered with a legitimate agency. Look up products using the SEC’s EDGAR database. Genkin also stated the importance of verifying a broker’s credentials, suggesting consumers do so using the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck tool.
7. Upfront Payment Requests
If you’re asked to provide an upfront fee to close a deal or are contacted out of the blue to make a payment you don’t recognize, be wary. Scammers may ask for such a “fee” or “expense” with the promise of paying it back later — which they won’t.
What To Do If You’re a Victim of Investment Fraud
If you think you’re a victim of investment fraud, build a file of all the information and communication you have related to the incident. “Gather evidence related to the fraud, including all correspondence, contracts and receipts. This can help you build a case against a scammer and potentially recoup some of your losses,” Allen stated.
Next, report the fraud. Genkin suggested reporting the incident to a variety of agencies: “Contact the SEC, your state attorney general’s office, FINRA and the Federal Trade Commission (FTC). All of them have departments that handle investor fraud complaints.” Finally, decide how you want to proceed — perhaps with a lawsuit, arbitration or mediation.
Know that taking these steps may not lead to your recovering your money, but they can help you move forward and be better prepared in the future.
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