How to Spot an Investment Scam in 6 Steps

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Carefully research any investment before making a purchase. ©iStockphoto.com/parema

Financial fraudsters use sophisticated and effective tactics to get people to part with their money. Here are six steps you can take to help you spot an investment scam.

1. Verify credentials. Don't fall for a fancy title or other trappings of success. Fraudsters hope that if they look successful, you won't bother checking their credentials. Investment professionals must register with FINRA, the Securities and Exchange Commission or your state securities or insurance regulator. You can use FINRA BrokerCheck, a free online tool to get information on brokers and investment advisers.

2. Don't chase "phantom riches." Be skeptical of investment pitches that guarantee a certain return or promise spectacular profits. They are what fraud-fighters call "phantom riches" that you will never see. No salesperson can make those kinds of promises. The reality is that every investment involves risk.

3. Ignore the "everyone is doing it" story. Don't believe claims that "everyone" is in on the deal. Be wary of a sales pitch that focuses on how many people are investing, without telling you why the investment is sound. Remember, affinity frauds are scams that prey upon members of the same social circle, religious group or ethnic background.

4. Refuse to be rushed. If the salesperson tells you that the offer is for a limited time only, or that investment opportunities are limited, consider it a red flag. A legitimate investment will still be there tomorrow.

5. Never feel obligated. Don't invest because the seller gives you something for free. Salespeople count on those freebies to guilt you into buying what they are selling.

6. Arm yourself with information. Learn to spot the red flags of investment fraud so you can protect yourself and your loved ones. Go to SaveAndInvest.org for more information.

FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.

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