Here are Six Common Types of Investment Scams that you Should be Aware of
1. Ponzi Schemes
One of the most notorious investment scams is a Ponzi scheme. These schemes produce revenue not from profit but by paying their earlier investors with capital sourced from new investors. The scam collapses when there are not enough infusions of new investors to sustain payments. There have been some of the most destructive schemes, such as Bernie Madoff, which have been highly publicized.
How to Identify a Ponzi Scheme:
- Unreasonable Returns: Any investment that promises high returns with little or no risk is a red flag.
- Consistent Returns: Investments promising or delivering consistent returns regardless of the market conditions should be approached with caution
- Lack of Transparency: Scammers tend to obscure details regarding the operations of the investment.
2. Pyramid Schemes
Pyramid schemes are often confused with Ponzi schemes but have a difference in that they only make a return on investment by recruiting people for the scheme to earn profits. The mechanism of a pyramid scheme depends upon a continuous influx of recruits to service the earlier investors. Like Ponzi schemes, they inevitably collapse when new recruitment slackens.
How to Recognize Pyramid Schemes:
- Heavy Emphasis on Recruitment: In pyramid schemes, there’s more emphasis on recruiting people as opposed to offering an actual legitimate product or service.
- Complex Compensation Plans: Avoid an overcomplicated compensation plan that structurally favors recruiting over sales, which should be a red flag.
- Product Lacking Value: The product or service sold too often is worthless or does not exist.
3. Pump-and-Dump Schemes
In a pump-and-dump scheme, scam artists drive up the price of a low-priced stock by circulating false or misleading information. Once they have driven the prices up with increased buying, they sell their shares at the inflated price. That leaves other investors holding worthless paper when the price crashes.
Identifying a Pump-and-Dump Scheme
- Unsolicited Stock Tips: Avoid any unsolicited tips from strangers, especially when obtained through online forums or social media.
- Overhyped Stocks: Be wary of an obscure stock that is very much hyped to return big gains.
- No Track Record: Most schemes target companies with little or no operational history and financial stability.
4. Advance Fee Scams
Advance fee scams demand an advance fee with a promise of some high return or opportunity. After paying the advance, those promised returns or services never materialize. Scams may operate under the guises of fake investment schemes, loans, and even legal aid.
How to Spot Advance Fee Scams:
- Advance fees: Don’t pay before getting any promised service or investment return.
- Vague Details: The con artist rarely gives you detailed descriptions of the sort of investment.
- Pressure to Act Quickly: You are forced into paying swiftly without time to think or even research the issue.
5. Crypto Scams
Well, of course, with the rise of digital currencies, cryptocurrency scams have also picked up. The fraudster can propagate fake initial coin offerings, create fake exchanges, or sell certain returns in schemes of cryptocurrency trading. The problem with these scams is that, since the nature of cryptocurrencies is usually decentralized and not regulated, it becomes all the more challenging to trace them down.
How to Recognize Cryptocurrency Scams
- Guaranteed Returns: If an investment promises sure-shot returns, that should raise a red flag single flag, especially in an increasingly volatile market like cryptocurrencies.
- Unverified Platforms: Always trade or invest on a reputable exchange that is well-known and regulated for the cryptocurrency.
- Too Little Information: Too little information about the team developing the project and about the technology means it’s a scam.
6. Affinity Fraud
Affinity fraud targets groups of shared affinity, such as religious communities, ethnic groups, or professional organizations. Some fraudsters leverage the trust inherent within those groups to their fraudulent investment schemes. They often use a respected member of that community to endorse the investment.
How to Detect Affinity Fraud
- Trust-Based Sales Pitch: If an investment primarily rides on the good name and reputation of a community member, watch out.
- Those with Exclusive Offers: Be cautious about the “exclusive” opportunities that are only reserved for those in your group.
- Lack of Due Diligence: If the investment is being done based on trust without proper verification, then it could well be a scam.
Conclusion
Investment scams are getting professional while playing around with the trust and financial hopes of individuals from various walks of life. Being well-versed with the most common types of investment scams, including Ponzi schemes, pyramid schemes, pump-and-dump tactics, advance fee scams, cryptocurrency fraud, and affinity fraud will give you a better opportunity to not get entrapped by such fraudulent investment schemes.
Always do your research in buying, be wary of a buy that seems too good to be true, and consider getting a financial advisor if you’re still in doubt.
