6 Types of Investment Scams – How Can You Avoid Them?

Stephanie Faris
Writer
Dolores Bernal
Editor
January 29, 2024
Investment Scams

I take the dog down our long driveway to our mailbox every day.

And more days than not, that walk takes me to a mailbox filled with nothing but junk.

There are the “0% credit card” offers. No, thanks.

There’s always at least one full-color postcard for landscaping or window treatments.

And about once a month, there’s an invitation to a FREE dinner at a $100+-a-plate steak restaurant.

These guys are not playing around. The invitation is almost always to a super expensive restaurant – usually Fleming’s or Ruth’s Chris in nearby Nashville.

The invitations command attention with their enticing photos of steak meals. And the invitation advertises a seminar on something they’re sure we’ll be interested in, such as “How to make loads of money so we can eat at those steak restaurants every night!”

I’ve attended a timeshare presentation before. I know how these things work. And that’s why those invites go straight to the shredder.

It’s not just that these “investment experts” hold us hostage while we endure their sales pitch. The timeshare people were downright rude the couple of times I did them. One even said, “So, you’re just here for the free breakfast?”

Um…yeah. Aren’t we all?

According to my research, these “free dinners” are about convincing attendees to buy into their supposed “great investment.” They first use scare tactics to convince the audience the future of finance is dire. They’re about to lose it all

Then they go in for the hard sell.

Even if you’re allowed to walk out without the one-on-one sales pitch, you’ll likely face a phone call later from a financial advisor who once again tries to convince you to buy in.

Have you ever heard the phrase, “There’s no such thing as a free lunch?” That goes for breakfast and dinner, too.

What are Investment Scams?

Yes, there are scammy investors and investment advisors out there. There are plenty of legitimate ones (and they hold seminars, too).

Some may even provide a free (pricey) meal with their sales pitches.

So how do you tell the difference?

First, it can help to know the top investment scams circulating. Some have been around for decades.

A legitimate financial advisor will be licensed by the Financial Industry Regulatory Authority (FINRA). You can check for that licensing on the FINRA website.

Investment scams run the gamut, but the “get rich quick” messaging is one hallmark. A reputable broker will offer advice but ultimately allow you to decide what to do. That broker will take a fee and invest your money, not encourage you to bring in others in exchange for a cut of the profits.

Even if a broker is licensed, it’s essential to research each investment, too. Not only should you ensure it’s legit, but it’s also important to know the investment is the right fit for your portfolio.

6 Types of Investment Scams

  1. Investment Seminar Scam
  2. Pyramid Scam
  3. Ponzi Scheme
  4. Crypto Scam
  5. Pump-and-Dump Scam
  6. Pre-IPO Scams
Types of Investment Scams

It’s never too early to set money aside for the future. Any extra money you have should be working for you.

If you can earn even five percent interest versus the .50 percent APY or less offered on most traditional savings accounts, that’s less work you have to do to bring that money in.

But investments can be risky, even when they aren’t scams.

That’s why it’s important to weed out shady investments. You can then focus on less risky ways to make money on your savings.

Here are some of the top scams. This list does not cover every single type, but it can help get you started on your research.

1. Investment Seminar Scam

What It Is: There’s no shortage of financial seminars; not all are perfectly legitimate. The closer you get to retirement, the more you’ll be targeted with ads promising to answer all your problems in one short session. 

In some cases, seminar hosts will parade a series of success stories, but those may be audience plants. These scams aim to get you to invest in something against your best interests. 

How to Spot It: The host’s credentials may sound impressive, but on closer inspection, you’ll find the person isn’t a licensed broker or doesn’t have quite the history that’s being sold. 

Yet the biggest hallmark of this scam is that you’re fed a dire vision of your financial future (the problem), followed by some sure path to riches (the solution).

How to Avoid It: Before attending any seminar, thoroughly research the host and the investment opportunity offered (if possible). You can find plenty of investing courses on Udemy and Coursera to give you a background. 

If you choose to attend one of these seminars, promise that you won’t take any action until you’ve researched the opportunity.

2. Pyramid Scam

What It Is: We’ve all heard the term “pyramid scheme,” but what exactly is it? 

With a pyramid scheme, investors are encouraged to recruit other investors. Each person in the scheme earns money from the people below. The better your recruits do, the more money you make. However, the topmost pyramid members are the biggest earners. 

Unlike multilevel and referral marketing schemes, your earnings come from those beneath you rather than commissions on sales to outside parties. 

How to Spot It: Multilevel marketing schemes can sometimes straddle the line, with many companies encouraging recruiting as much as, if not more than, sales to outsiders. 

The telltale sign of a pyramid scheme is the emphasis on recruiting and the lack of viability in the products being sold. If you join, the pressure to make your goal, even if you need to pay out of pocket, will alert you that it’s a pyramid scheme.

How to Avoid It: Conduct thorough research into any business venture you’re considering. If it’s a new business, ask for detailed information on how payments will be structured. If the person recruiting you is cagey or flat-out refuses your request for information, pass.

3. Ponzi Scheme

What It Is: Like pyramid schemes, Ponzi scams keep the earnings within the group. In this case, though, there’s no pretense that you’re selling products. It’s an “investment opportunity,” and you’ll be promised riches in exchange for an initial investment. 

Ponzi schemes are named for Charles Ponzi, a Boston financier who swindled people out of millions in the early 1900s, in part with a postal reply coupon investment scam. 

How to Spot It: The good news is that Ponzi schemes are easier to detect than pyramid schemes. 

With a pyramid scheme, you’re often lured in by a useful or interesting product. You don’t realize the money is being made by recruiting new sellers. Ponzi scammers promise little to no risk, which should be a red flag. Any shot at sudden wealth comes with a sizable risk element. 

How to Avoid It: As with pyramid/multilevel marketing schemes, questions are key to ensuring you’re signing up for a legitimate opportunity. Research what you’re investing in and ask for the investor’s credentials at the head of this supposed brilliant strategy.

4. Crypto Scam

What It Is: It can be easy to get caught up in the thinking that crypto is the investment of the future. 

With crypto scams, you’re coaxed into either sending cryptocurrency or paying cash to invest in some exciting crypto opportunity. Sometimes, you’re sold the plan to buy low and sell quickly –– a crypto version of the “pump-and-dump scam” covered in the next section.

How to Spot It: Like other investment scams, the biggest red flag is the promise of quick wealth with no risk. Crypto is risky, both as a purchase and investment. Crypto and other digital assets have been listed as the top threats to investors.

How to Avoid It: Steer clear of anyone who makes big promises in the name of investment opportunities. If you want to invest in cryptocurrency, counterbalance the risks with low-risk investments, making it a small part of an overall portfolio.

5. Pump-and-Dump Scam

What It Is: This type of scam is a coordinated attack, with investors putting money into the same stock to inflate the price over a short timeframe. 

But investors may also loop you into the investment (along with numerous others), feeding you the myth that it’s a “great opportunity.” 

Once the stock price hits the desired threshold, the original team of investors sells, leaving you and the other unlucky investors with a huge loss. 

How to Spot It: If you’re hearing about a great stock, first look to ensure it’s exchanged on the Nasdaq or New York Stock Exchange. 

Often pump-and-dump scams target stocks sold on the over-the-counter market. Research every stock independently of what you’re being told and always greet claims of high reward/low risk with skepticism.

How to Avoid It: Although getting stock tips from friends and relatives can be useful, it’s best to stick with impartial experts. Random strangers on the internet are best ignored.

6. Pre-IPO Scams

What It Is: When a company goes public, it’s a big event known as an initial public offering (IPO). 

In the days leading up to that big moment, though, some companies offer a pre-IPO, during which select investors can buy in early. When done correctly, it’s a great way for a business to raise funds and generate excitement. 

Yet scammers also create fake pre-IPOs for businesses that don’t exist or have no intention of going public. 

How to Spot It: If someone is offering you pre-IPO, it should make sense. Either you have a connection to the business or you’re well established in the same industry. 

If someone you barely know makes the offer, stop and research. It’s probably a scam.

How to Avoid It: Don’t just research the business associated with the offer, also look into the person making the offer. Some scammers might offer pre-IPOs to legitimate businesses that have no intention of going public and/or wouldn’t let you in on a pre-IPO.

How To Avoid Investment Scams?

1. Research Every Opportunity

Before you put your money into anything, you should do research.

Are you working with a reputable financial advisor? 

Is your buddy recommending a “great opportunity” in any way qualified?

Using FINRA’s Broker Check tool, you can quickly check the credentials of any wealth advisor, including brokerages.

The U.S. Securities and Exchange Commission also has a lookup tool that can help you verify credentials.

You can also check the opportunity itself. If a business is public, you can sort through its financial documents. These are required to be publicly displayed. You might have to do some digging, but they’re out there.

Any time I’ve needed to track down a business’s financial documents, I’ve found quarterly earnings calls useful. You can sometimes find transcripts or summaries online. Summaries are great for grabbing pertinent details.

2. Be a Skeptic

I tend to be an optimist.

I also have a hard time saying no to a high-pressure salesperson.

That’s a dangerous combination when it comes to scams.

If someone’s trying to take my money, though, I weasel my way out of the conversation as quickly as possible.

I do not take risks when it comes to my investments. I stay on the safe side.

And I know better than to assume some get-rich-quick scheme comes without risks.

A healthy dose of skepticism is always good where investments are concerned. You should stop and question at every single step. 

If a friend (or stranger) is trying to sell you on an investment, do me a favor. Take notes. Tell the person you’ll research and get back to them. And do exactly that.

Do not commit until you’ve thoroughly researched the investment. Even then, if you’re uncomfortable, don’t do it no matter how many times someone tries to coax you into it.

3. Avoid Providing Information

Scammers aren’t just after your money. In some cases, they steal your information.

Someone may want you to complete an application or link your bank account for direct deposit.

That’s a great way to have your information (and sometimes your money) stolen.

Before handing over your contact information, ensure you’re dealing with a legitimate company. Identity theft is no joke.

What If Your Investment Were Scammed What Would You Do?

Recovering from Investment Scams

Someone got your money, and now you realize it was a scam.

Don’t panic. There are a few things you can do.

1. Check With Your Lenders and Banks

If you’ve been defrauded, your bank may be your first call. First, you’ll want to let them know if your account might have been compromised. At the very least, you’ll need to update your password and other security information.

There may be a way to recover the funds depending on how much you paid and how you paid it. Credit card charges can be reversed within 60 days in most cases.

However, if you sent the funds via wire or ACH, chances are, you’re likely out of luck.

2. Consider Identity Theft Protection

Money isn’t the only way investment scammers can affect you.

Some can snatch your information and use it to commit fraud.

You’ll want to take measures to safeguard your identity.

Identity theft protection services like Aura, LifeLock, and IdentityForce can watch for signs that someone might be using your information to apply for credit.

If you suffer an identity theft issue, these services can also help clean up and cover some of the cost through insurance.

3. Report It

The Federal Trade Commission wants to know about scams that are currently circulating.

The FTC takes reports on scams and takes action where possible. Those include widespread investing scams. Reporting the attempted fraud could be what it takes to shut a scammer down before they can try to defraud someone else.

Conclusion

Finding the right investment can be challenging.

But plenty of opportunities can keep you safe while also boosting your savings.

Avoid “too good to be true” offers or anything that promises big rewards with little risk. Even if it means opting for low-risk investments that grow your money slower, it’s better than sinking a large sum into a scam. 

Take action, watch out for your information via a service like Aura or LifeLock, and don’t be afraid to invest once you do some research.

And if you do see a scam, warn others. If someone approaches you, chances are that person has tried the same scam on others.

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