Can You Identify a Fraudulent Investment?

In the 1920s, when a supposed businessman named Charles Ponzi was under investigation by the U.S. postal and legal authorities, lines of people gathered outside his company. Not all of them were there to demand their principal investment in international postal vouchers back. Some still came with money, hoping Ponzi could make them rich in 45 days as he had claimed.

The Ponzi name has since been associated with a type of scam known as “borrow from Peter to pay Paul”. Ponzi schemes became notorious later thanks to Bernie Madoff. In the age of the internet, investment frauds like this take place nearly every day. Despite the newspaper headlines, new investors continue to fall victim to such scams, like the people who stood outside Charles Ponzi’s office even as he was being exposed as a con artist.

Investment fraud is built upon elaborate lies. Can you spot a scam if it were staring down at you from the stock market? Here is a list of important tips to keep in mind to avoid falling victim to the most common types of investment fraud:

Know Where Scams are Rife

Theoretically speaking, fraud can affect just about any type of investment. However, scams are particularly common where pink sheet penny stocks are traded. Investors have to be particularly vigilant when trading these types of stocks, and know what stocks to buy now as they start out.

Before spending your money, check the securities filings for the company. Make sure the company is viable and manufactures products as the listed name suggests. For example, don’t buy cheap stock listed under a company with the name “cannabis”, believing you are buying lucrative marijuana stocks. The company may not have anything to do with the up-and-coming sector, and could just be using the word to dupe investors.

Avoid All Get-Rich-Quick Schemes

Ponzi was so successful not particularly because he was a master of finances, but because he masterfully understood human psychology. Ponzi played into the greed and ambition of people and manipulated them in his grand scheme. This is essentially what all the new get-rich-quick scams do. The idea of a small payment making you a millionaire is irresistible. That’s exactly why you should be cautious about claims that promise you such things. If it sounds too good to be true, it probably is.

Check the Company’s Background

You can check if the company you are about to invest in has a seedy past by going through SEC reports. The SEC makes over 21 million files available that have been listed since 1984. You can submit an inquiry asking if the SEC has taken any action against the entity in the past. You can also check if the company’s financials are audited by a certified public accountant.

Unsolicited Offers are Best Ignored

If you get a Facebook message, email or a chat message on any social media or online communications platform about oh-so-amazing investment opportunities, ignore them. Most people are now aware of such email or messenger scams. However, these unsolicited messages can be hard to ignore if your friends or colleagues are sharing them with you.

Never take such messages at face value. If a friend is bombarding your inbox with them, first enquire about where they heard it from. Trace the message back to its original source and see if it’s coming from a trustworthy place.

You can avoid most investment scams by not following the herd mentality. Take claims coming even from trusted advisors with a grain of salt. Use online tools like those provided by the SEC to research the company you are investing in and protect yourself from the next Ponzi scheme.