When it comes to investment scams, there's nothing really new under the sun. Instead, modern scams usually make use of tried and true methods from the past, with a modern twist.
As such, it is important to be familiar with some of the most popular investment scams. Here we will take a look at three.
Pump and Dump
The pump and dump scam was the subject of the recent movie “The Wolf of Wall Street.”
In it, an investment is hyped up and sold by the fraudsters, who usually hold a significant of amount actionable shares. Once the feverish hype has pumped the phony investment's price way up, the fraudsters dump, selling out their shares. The sell off tanks the value of the investment, leaving those who invested with practically nothing.
This kind of investment, which usually affects stocks, can be particularly difficult to spot because the investment itself may be legitimate. It’s the tactic of hyping a stock with the intention of dumping it later which is illegal.
How to avoid: The SEC's tips include checking its database before investing in a stock, to see if it is registered on an exchange and thus has detailed disclosures available. If the investment is not, the SEC also recommends that you check with your state regulators to see if the company is registered with them. State-level registration only can happen in the case of smaller companies.
Pyramid and Ponzi schemes have much in common, and for all intents and purposes can be considered together. In this kind of scheme, the investment from later rounds of investors is used to pay the return to the investment of early investors.
For example, in the pyramid scheme TelexFree, which was banned in Brazil, people were asked to invest approximately $1,500 for the right to receive $5,200 paid out in weekly installments of $100 per week for a full year. In this kind of scheme those who enter the investment first will initially be repaid from their own money. To keep the scheme going and pay the entire $5200, the scammers must look for new investors.
This kind of scheme always fails, because at some point it will be impossible to find enough people to sustain the ruse.
How to avoid: In order to avoid being the victim of a Ponzi scheme theSEC recommends that you carefully check into the licensing and registration of those with which you desire to invest, and to be especially wary of investments which promise abnormally high and abnormally consistently returns.
Probably the oldest investment scam in history, lying is often not included on lists of the most prevalent investment scams. Though all investment scams entail a measure of deception, many offer the investor at least a marginal return, or the ability to recuperate some percentage of their original investments.
But in the case of outright deception, for example when someone calls you on the phone claiming to be from a securities brokerage – but is really looking to clear out your bank account - the investor not only loses their money, but has very little hope of ever recovering any portion.
How to avoid: You can avoid being the victim of outright deception by following the same advice that was given for the first two kinds of scams. Research the opportunity thoroughly, verify licensing and registration, and avoid “opportunities” sound too good to be true.
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