Every year, thousands of people are victims of investment fraud. In the past, these frauds were targeted at the uneducated or trusting individuals like senior citizens. However, every year the scams are getting more and more elaborate. This means that these scams are not starting to hit individuals who will never have been scam in the past.
However, with the right awareness and education, investors can spot these scams and avoid them. It is critical for investors to recognize that these frauds exist and make certain that every investment decision is put on with the utmost care.
This article is going to review the most common types of fraud and what you can do as an investor to protect yourself.
Types of Investment Fraud
There are a number of different types of fraud that both first time investors and seasoned professionals need to watch out for. Here are two of the most common ones.
1. Pump and Dump
A classic pump and dump happens when an individual who holds a huge stake in an individual stock attempts to make the share prices go higher. To do so, he/she will “pump” the market with false statements and lies about the company. For example, a pump and dumper holding a lot of a junior mining stock may go to internet message boards or Twitter to announce that the company is going to announce a brand new resource discovery that will add huge earnings to the company’s financial results.
Their hope is that investors get suck into believing this lie. When they do, they will start to buy the stock, driving the share price higher. After this happens, the pump and dumpers will sell their stock at the higher price. They will then walk away with a huge profit, leaving investors that bought the stock at the higher levels with big losses.
These stocks are usually penny stocks with no real business, the chance of recovering your investment is very small.
2. Pre-IPO Fraud
When a previously private company goes public on the stock market, there can often be big money to make. For example, if you had bought Google’s shares at IPO you would have had an 18% gain on the first day.
As a result, many investors are keen to get the opportunity to get IPO shares before it goes public at the IPO price. Many banks and brokers offer clients the ability to do this. This is especially so for their best customers as a perk. Which also means that it is very hard to get these IPO shares.
Scammers have recognized this and are taking advantage of the desire investors have of getting in on IPOs. They offer the ability to get access to a special pool of shares that they somehow gained access to. They will then request that you send them thousands of dollars to buy these shares. The problem is that the scammer does not have access to these shares and you will never actually receive them. Your money is gone and it will be very hard to get back. That is if you can get it back at all.
How to Avoid Investment Fraud
In order to avoid investment fraud, there are a couple of red flags to look out for. First is the promise of “guaranteed returns”. There is no such thing as guaranteed returns. Any person or company who offers that will more than likely be trying to scam you out of your money.
Second is the pressure to send the scammer money right away or the investment will disappear immediately. Good investment opportunities will always allow for due diligence and research time. The need to invest right away is a good sign that something is wrong and you should steer clear.
Finally, if it sounds too good to be true it probably is. This is one we all know, but it is easy to get suck into the dream of supersize gains. If something just isn’t sitting well with you and you have that feeling that things look too good, then walk away. Another real investment will pop up shortly and you won’t be at risk of losing all your hard earned capital.
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