There is always an element of risk versus reward with an investment. You are never guaranteed to get all your money back.
However, some investment opportunities are straight-up scams. Ponzi schemes and other investment fraud is up 70% since the beginning of the Covid-19 pandemic. These fraudulent schemes are disguised as something trustworthy and lucrative.
So, how does one differentiate a perfectly legitimate investment from a conniving scam? Keep reading to find out 5 helpful tips to stay safe from criminal fraudsters.
1) Making Promises
As we mentioned before, there are never any guarantees with investing. There will always be the risk of losing more money than you gain. Thus, you can almost immediately spot an investment scam when a person begins to make promises.
For example, they might say that you will “undoubtedly make a profit” by investing with them. Or you may have a company tell you that “all our investments are risk-free.” Not possible.
When selling anything, it is unlawful to make such claims and deliberately mislead consumers. As such, promises and guarantees are a big, fat red flag. Run in the opposite direction.
2) Low Risk, High Reward
Here is a solid rule to take to heart: low risk will provide low rewards, whilst higher risks have higher rewards. This is a fundamental rule of investment that cannot be changed.
Therefore, if somebody is offering you a deal with low risks but very high rewards, this is a big red flag that they are a fraud. When something sounds too good to be true, it usually is.
A perfect example of this is the Ponzi scheme. Ponzi schemes (such as the infamous one run by Bernie Madoff) offer “guarantees” of abnormally high returns (20% or more). In 2009, Madoff was sentenced to 150 years in prison for swindling investors out of billions of dollars. As a former NASDAQ chairman, Madoff had credentials, so his many investors did not pay attention to the red flag of his “too good to be true” fund. They believed they were lucky to be allowed into the inner circle of a trading “genius.”
Of course, it's easy to be fooled by this kind of investment scam, especially if you don’t know much about the subject. So, make sure you are well educated before depositing large sums of money into any investment.
3) Background Information
Most scammers will pose as esteemed businesspersons, but their background should quickly expose them as fraudulent.
We recommend doing an internet search on the person and their offer before investing in anything. See if you can seek out any credentials that prove their legitimacy.
If you can’t find any information, this is a very good indicator that the investment deal is a scam.
Unfortunately, you can still sometimes be fooled by false documentation which looks real. In these circumstances, you can get seek out a company, such as Payback, to help you regain the money you have lost.
4) Pushy Salesperson
Fraudsters are usually very pushy and try to rush you into making a rash decision. They tell you you have to act “immediately” or else you'll lose out on the deal.
When you are panicking, you're less likely to be assertive and think things through properly – allowing the person to scam you. Sniff out pushiness for what it is: another red flag.
5) Complicated Explanations
Investment scammers will try to confuse you with convoluted explanations and nonsensical terminology. This makes them appear knowledgeable and leaves you feeling clueless, so you are more inclined to put your trust in them.
If you are ever confused about what exactly you are investing in, this is a good sign you shouldn’t be making this deal.
Precious metals, foreign currency exchange, cryptocurrencies, and penny stocks can be very confusing, and therefore you should be especially on your guard if you're looking into any of these types of investments.
These are some of the best ways to spot an investment scam and ensure you don’t put your money in the wrong person’s hands. Always trust your gut: if something smells fishy…it most certainly is. Don't try to convince yourself otherwise.
If you are just starting your investing journey and need some more practical information, make sure to read Big Picture Investing: Why You Need to Get in the Game Now!