What Investment Fraud Is and How to Avoid It
By: Anish Agarwal
Investment frauds. Two very common words, right? However when these two words are used together, they form an exceedingly complex concept that can be difficult to comprehend.
Because investment fraud is becoming more and more common in the current world, it is imperative to not only understand what investment fraud is but also to understand how you can avoid investment fraud. Being a victim of investment fraud means a huge financial loss, which is something we know you do not want. Therefore, this article explains what investment fraud is and the steps you need to take to avoid investment fraud.
Note: We have moved our website to fmearticles.com; therefore, you can find this article at the following link: fmearticles.com/what-investment-fraud-is-and-how-to-avoid-it/
The link above is a more recently updated article that contains all the information you need to know about what investment fraud is and how you can avoid being a victim of it.
Because investment fraud is becoming more and more common in the current world, it is imperative to not only understand what investment fraud is but also to understand how you can avoid investment fraud. Being a victim of investment fraud means a huge financial loss, which is something we know you do not want. Therefore, this article explains what investment fraud is and the steps you need to take to avoid investment fraud.
Note: We have moved our website to fmearticles.com; therefore, you can find this article at the following link: fmearticles.com/what-investment-fraud-is-and-how-to-avoid-it/
The link above is a more recently updated article that contains all the information you need to know about what investment fraud is and how you can avoid being a victim of it.
What Investment Fraud Is and How You Can Avoid Investment Fraud
What Are Investment Frauds?
Investment frauds, in simple terms, are when a third party illegally sells assets. The assets sold hold no value-as they are unregistered-but boasted to be worth a lot. Endeavoring to convince investors to invest, fraudsters spread incorrect information.
For instance, the seller might attempt to convince people by offering little (or zero) risk, guaranteed returns, unregistered securities, complex strategies, or any other exceptional offer.
For instance, the seller might attempt to convince people by offering little (or zero) risk, guaranteed returns, unregistered securities, complex strategies, or any other exceptional offer.
Who Can Conduct Investment Frauds?
In order to successfully implement an investment fraud, it is imperative for the perpetrator to gain the victim’s trust. This is a necessity because if the victim doubts the company/organization, he or she will most likely not invest. For this reason, the fraudster may range from a clever stranger to a sports coach to a neighbor.
Who is Most Vulnerable to Becoming a Victim?
You probably think that everyone is equally at risk of investment frauds; however, investment frauds tend to target affinity groups. Affinity groups are more prone to becoming victims of investment fraud because perpetrators can utilize the common interests to build trust and eventually conduct investment fraud against them.
Apart from groups, certain qualities also make individuals more susceptible to investment fraud. Researchers have identified 8 traits that most victims possess: male, old age, conservative, interested in unsolicited offers, prefer unregulated investments, regard wealth as success, trade often, and invest with unknown sellers.
Overall, scammers can effortlessly establish trust between people with whom they have something in common. For instance, older people tend to trust more easily and also have abundant money in savings. This is why senior citizens are targets for investment fraud.
Apart from groups, certain qualities also make individuals more susceptible to investment fraud. Researchers have identified 8 traits that most victims possess: male, old age, conservative, interested in unsolicited offers, prefer unregulated investments, regard wealth as success, trade often, and invest with unknown sellers.
Overall, scammers can effortlessly establish trust between people with whom they have something in common. For instance, older people tend to trust more easily and also have abundant money in savings. This is why senior citizens are targets for investment fraud.
How to Avoid Investment Fraud
After learning what investment fraud is and how it happens, you must also know how to prevent being a victim of investment fraud. Therefore, FME Articles has devised and listed the 16 best tips to avoid investment fraud. If you adhere to the following 16 tips, your chances of becoming a victim of investment fraud will be minimized.
- Research the company before investing.
- Look at online reviews, especially those from verified/trusted critics and websites.
- Visit other websites. Note: Only use .gov websites unless looking at reviews.
- Avoid investing due to the mere reason of a website that appears to be professional or legitimate.
- Be extra careful when receiving a special investment offer, especially if you are receiving it from a standard email domain.
- The offer could be through phone, email, or any other platform.
- Be vigilant of foreign companies.
- Read all the terms and conditions, and inquire about anything that looks ambiguous.
- Only trust money managers that are regulated by the Securities and Exchange Commission
- Never give any money manager complete control, regardless of the foundation they are from.
- Be wary of companies that are hesitant to explain the investment process.
- Verify that the investment and company are registered by calling DFI’s Securities Division. Also, ensure that they are registered with the Washington State Department of Financial Institutions (DFI).
- Be extremely careful of companies that require the investor to act now.
- Never invest in something that does not provide written information about the company and the investment. The written information is known as a prospectus or an offering circular.
- Don’t believe everything you see on social media, as it has become an immensely large platform of fraud.
- Beware of phony credibility. A seller may fake their credibility, so be sure to check out actual qualifications from trustable websites.
Types of Investment Fraud
Advance Fee Fraud
Advance fee fraud is when the payment is due before the deal is confirmed. The amount paid is said to be an expense that will be reimbursed. These types of fraud usually involve investment offerings or lottery winnings.
Affinity Fraud
Discussed above
High Yield Investment Programs (HYIPs)
In simple terms, high yield investment programs are unregistered investments sponsored and offered by unregistered sellers. Similar to most other investment fraud, these also propose great value with little to no risk.
Microcap Fraud
The microcap market is the over-the-counter market for securities, which comprises companies with few assets and low stock prices. Signs of microcap fraud are sudden business name changes and unexplained rise in stock prices.
Binary Options Fraud
The binary options market does not comply with the United States’s regulatory requirements, causing investors and sellers to engage in illegal activity.
A binary option is a contract whose outcome depends on a “yes or no” bet. The majority of times, this bet is whether the price of a particular asset will increase or decrease.
Once the binary option is acquired, the holder cannot make any additional decision, including the right to buy or sell the asset. When the binary option automatically expires, the investor may or may not receive a predetermined amount of cash.
A binary option is a contract whose outcome depends on a “yes or no” bet. The majority of times, this bet is whether the price of a particular asset will increase or decrease.
Once the binary option is acquired, the holder cannot make any additional decision, including the right to buy or sell the asset. When the binary option automatically expires, the investor may or may not receive a predetermined amount of cash.
Offshore Scams
When foreign fraudsters illegally sell securities to people inside the United States. Since they reside outside of the country, it is exceedingly difficult for law enforcement to do anything about it.
Ponzi Schemes
When a scammer collects money from new investors to repay old investors. Although this sounds like an effective method, it eventually fails when the scammer is unable to find any new investors.
Pre-IPO Investment Scams
Pre-IPO investment scams occur when sellers offer people to buy a company’s stock before it is available to the public. IPO stands for initial public offering; therefore, this investment fraud occurs before a company establishes its IPO.
Pyramid Schemes
Pyramid schemes are when scammers claim to be able to produce substantial profits from a small investment. It may function for a short period of time; however, pyramid schemes quickly collapse when no new investors invest.
Pump-and-Dump Scams
Pump-and-dump scams occur when scammers buy shares of cheap stock. Then, they spread misleading information to “pump” up a company’s stock price, only to “dump” their own shares. This makes them a profit, but causes stock prices to plummet, resulting in a loss for the investor.
Promissory Notes
This is when investors loan a company money, with the assurance of receiving a fixed amount periodically. Like always, the rate of return is said to be high, while the risk is said to be minimum.
Prime Bank Schemes
Prime bank schemes are when investors buy prime bonds from foreign banks or markets and the perpetrator splits the profit. These bonds are usually nonexistent.
Something Important to Remember
If you are a victim of investment fraud, be sure to report it. Doing so will increase the chances of receiving your money and preventing others from falling into the same trap.
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Works Cited
fbi.gov. “Investment Fraud.” FBI, FBI, 15 June 2016, www.fbi.gov/scams-and-safety/common-scams-and-crimes/investment-fraud.
Investor.gov. “Types of Fraud.” Investor.gov U.S. SECURITIES AND EXCHANGE COMMISSION, www.investor.gov/protect-your-investments/fraud/types-fraud.
Investor.gov. “What You Can Do to Avoid Investment Fraud.” Investor.gov U.S. SECURITIES AND EXCHANGE COMMISSION, www.investor.gov/protect-your-investments/fraud/how-avoid-fraud/what-you-can-do-avoid-investment-fraud.
Turner, Terry, and Kim Borwick. “Investment Fraud.” ConsumerNotice.org,
www.consumernotice.org/data-protection/fraud-and-scams/investment/.
“Types of Investment Fraud.” Save and Invest, Finra Investor Education Foundation, www.saveandinvest.org/protect-your-money-spot-and-avoid-fraud/types-investment-fraud.
Washington State Department of Financial Institutions. “Steps You Can Take To Avoid Investment Fraud.” Washington State Department of Financial Institutions, dfi.wa.gov/financial-education/information/steps-you-can-take-avoid-investment-fraud.
Investor.gov. “Types of Fraud.” Investor.gov U.S. SECURITIES AND EXCHANGE COMMISSION, www.investor.gov/protect-your-investments/fraud/types-fraud.
Investor.gov. “What You Can Do to Avoid Investment Fraud.” Investor.gov U.S. SECURITIES AND EXCHANGE COMMISSION, www.investor.gov/protect-your-investments/fraud/how-avoid-fraud/what-you-can-do-avoid-investment-fraud.
Turner, Terry, and Kim Borwick. “Investment Fraud.” ConsumerNotice.org,
www.consumernotice.org/data-protection/fraud-and-scams/investment/.
“Types of Investment Fraud.” Save and Invest, Finra Investor Education Foundation, www.saveandinvest.org/protect-your-money-spot-and-avoid-fraud/types-investment-fraud.
Washington State Department of Financial Institutions. “Steps You Can Take To Avoid Investment Fraud.” Washington State Department of Financial Institutions, dfi.wa.gov/financial-education/information/steps-you-can-take-avoid-investment-fraud.