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If you think a deal sounds too good to be true, it probably is. However, millions of people fall victim to investment scams every year – just watch Dateline or American Greed pretty much any night of the week. Here are some common investment scams that you should pay attention to, whether you are investing yourself in your own account, or you are using a broker to invest for you.
Common Investment Scams
Advance-Fee Fraud - This is just like it sounds, but many people fall victim to it: a broker or agent will request a fee to get you into a great investment. The most common version of this is your spam email for “Nigerian Oil”. Basically, for a fee, it promises to get you into some hot new oil deal in Nigeria. Well, guess what, once you pay the fee, the scammers are gone. What to look out for? You should never have to pay a fee in advance of it. You usually pay a commission upon purchase when buying securities. So, don’t pay anyone ahead of time!
Internet Fraud – There are several types of internet frauds going around, but they all have one thing in common, they rely on random individuals to benefit themselves. The most common internet fraud is using a bulletin board or forum to promote a stock, and get others to buy into this stock. Once the stock increases in value, they poster dumps the stock. This is the traditional “pump and dump” you may have seen in the original Wall Street movie, but with an internet twist. What to look out for? Only invest in stocks which you have thoroughly researched personally; don’t take random forum posts into consideration.
Ponzi Schemes – This is where money from new investors is used to provide a return to previous investors. This is Bernie Madoff’s scheme, which was the biggest investment fraud in history. This scheme collapses when there is not enough money to pay the early investors. These schemes will always collapse – the question is how long, and it is based on how good a salesman the leader is, and how much capital he can keep raising. What to look out for? Too good to be true returns over a long period of time.
Prime Bank Schemes – This is a scheme where a broker or dealer tries to sell you “high quality” bonds or notes from known banks or institutions, such as the World Bank. However, most of these prime banks in real life never sell notes to the public, so the fact that someone tries to sell them to you should raise a huge red flag. Basically, these things don’t exist, and so you’re just giving someone your money. What to look out for? Once again, do your own research on any investment you want to buy.
Readers, do you know of any other common investment scams? Know anyone who has fallen victim to one?
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This post was written by...
Robert – who has written 317 posts on The College Investor.
Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.
{ 12 comments… read them below or add one }
Those internet pump and dump schemes are all to common. I remember reading some story about how a penny stock was placed on the front page of google news [which was a paid placement] and then the stock price skyrocketed before crashing down on the backs of unknowing investors. It is sad how people are so willing to try and put faith in penny stocks, when usually they have been delisted from the major stock exchanges for a reason.
Anything in your inbox that come from someone you don’t know – probably a scam. I haven’t invest in a scam before and hopefully I will continue to avoid them.
This is some great advice — especially for those who are new on the investment scene. Great article!! You always should be on the lookout — it’s better to be leery than to be sorry.
Great tips! You should always be cautious.
thanks for the tips robert , people still fall for scams unfortunatlly
The only one I’d heard of here is the Ponzi scheme. But what about real estate investment schemes? (Buying land that doesn’t exist or is worthless, etc.)
I could probably do a whole other post on real estate schemes!
I have lots of opportunities every week to make millions, or so they tell me. I must be just plain lazy.
Hahaha…you must be!
Robert I get mails on penny stocks which were just about to explode. I am amazed by seeing the rate at which people trust me for transferring millions of dollar from a great ‘just-dead’ leader somewhere in Africa.
You should feel pretty lucky to get such great advice!
You can never be too cautious now a days. A family member of mine once fell victim and it was a MESS. Thanks for the read.
-Ashley Morrissey
ashleymorrissey90(at)yahoo(dot)com