What is an Investment Fraud?
Investment fraud is a type of fraud in which an investor’s money or other assets are intentionally misused by the person managing those assets. When done with criminal intent, it is a form of theft.
Investment fraud can be perpetrated by anyone with access to investors’ funds, including investment advisors, brokers, and financial planners. It is also committed by people who pose as legitimate financial professionals and offer investments too good to be true.
The critical sign of investment fraud is that the person or company offering the investment opportunity will ask for money upfront before any returns are generated.
5 Types of Investment Frauds You Should Be Aware Of
While most investment scams are detectable, it has various types. And some of it could look true or have a legal business. As such, it’s essential to be aware to avoid investment fraud. Here are 5 of the most popular investment scams you should avoid.
1. Ponzi/Pyramid Schemes
A Ponzi scheme is a type of fraud that lures investors by promising to pay high rates of return. Ponzi schemes are often set up by companies that initially seem legitimate. Still, they collapse because the company uses new investors’ funds to pay off older investors who want to withdraw their money.
Likewise, Ponzi Schemes are probably one of the most prominent and popular types of scams worldwide. According to Eisner Amper, between 2008 and 2013, the Ponzi scheme involved approximately $98 million.
2. Real Estate Investments Scam
Real estate investment scams are a type of fraud that can be difficult to identify and prove. The scammer may offer the victim a chance to buy an investment property, such as a house or condo, at a meager price. They might say they need money quickly and don’t have time to fix the property before selling it. Or they might claim they require extra cash and want to sell the property soon to repay their debts.
The scammer will then ask for some money upfront for repairs, taxes, or other fees. They’ll also ask for more money later on to make more repairs or renovations. The scammer will often claim that there’s a lot of potential profit in the property because it’s cheap, but there is no
3. Pump and dump scam
The pump and dump scam is one of the most common types of investment fraud. It usually involves artificially inflating an owned stock’s price through false and misleading positive statements. This is to sell the cheaply purchased shares at a higher price.
4. Boiler room scam
Boiler room scams are investment fraud that uses high-pressure sales tactics to sell investors stocks, bonds, and other securities. The scam typically involves cold calling potential investors and pressuring them into investing.
5. Offshore investing scam
Offshore investing scams are fraudulent schemes that offer investors high investment returns. Investors are often promised a high return on their investment, but in reality, they are not getting anything.
5 Tips to Avoid Investment Fraud
1. Remember to diversify
1. Remember to diversify
Diversification is one of the top ways to avoid investment fraud. Diversification is the act of investing in a variety of assets to reduce your risk and increase your returns. As an investor, you can diversify by investing in stocks, bonds, and other securities. You can also diversify by investing across asset classes such as real estate, commodities, and currencies.
The benefits of diversification are:
Reduces the volatility of your portfolio
Decreases the correlation between various investments
Increases the chances that you will have some winners in your portfolio
2. Be suspicious of high-pressure sales
High-pressure sales investment fraud is a scam often sold to people who require money. The most common high-pressure sales investment fraud scams involve stocks, bonds, or other investments that can be bought through a broker.
The scammer might say they have access to an exclusive opportunity for you. Still, they won’t tell you the details until you agree to buy the stock at an inflated price. They might also say they’re going to sell it back to you at a profit after just a few days – but there’s
The scammer will tell the person that they will get a high return on their investment and will pressure them into making the decision quickly. These scams are usually carried out by con artists who will take advantage of someone’s vulnerability and use it against them.
Likewise, doubting high-pressure sales investments is vital to avoid investment fraud.
3. Beware of the promise of high rates of return
High-rate returns are usually eye-catching to new investors. The promise of high rates of return investment scams is nothing new. It has been around for decades and has many different variations. This is one of the book’s oldest scams, and con artists know it appeals to people.
Likewise, another way to avoid investment fraud is to be aware of high rates of return. Remember, the higher the return, the riskier it gets. There is no such this as a risky investment. Always inspect.
4. Ask For Prospectus or Offering Circular
A prospectus or an offering circular is a document that companies that want to offer their securities to the public must be filed with the Securities and Exchange Commission (SEC). It usually includes information about the company and its management, business operations, financial condition, and prospects. Likewise, the prospectus has any history of loss or lack of earnings in the past and any potential conflicts of interest involving directors and officers of the company.
Prospectuses are typically used when companies want to offer stocks, debentures, or other securities that are not traded on a national securities exchange.
Likewise, to avoid investment fraud, a prospectus is essential. It provides investors with all the information they need to make an informed investment decision.
5. Always verify
Verifying is one of the most foolproof ways to avoid investment fraud. Usually, individuals or businesses selling investments, stocks, or properties need to be licensed by their country or city. Always check for licenses, business permits, etc.
You can also look for reviews online or talk to someone who invested in the same company.
Ready to start investing?
Investing can be rewarding to businesses. The benefits of investing are limitless and can provide huge revenue. However, scams are prevalent around the world. Always be on your guard and use your common sense when dealing with any company.
Always ask questions and look for security. Credible investment companies can provide you with whatever you ask. And if you are looking for a company to invest in, Flexilabs can help you! We help startup companies validate their ideas into a viable products. Contact us now!