Everyone would like to earn a high return every year on their investments. Some people claim they can beat the market every year while others promote investments that offer solid returns with little or no risk.
Here are a few common investment scams that have been around for a long time, yet are popular because they still find victims every year.
Pump & Dump
A pump & dump involves heavily promoting the purchase of (a completely legitimate) company stock. The promotion leads to high demand which raises the stock price.
This type of scam was featured in the movie Wolf of Wall Street – in which one man (played by Leonardo DiCaprio) made over $1M per week from commissions on penny stocks.
When the stock price is raised high enough, the early investors (doing the promoting of the stock) sell for a large profit. The promoting then stops and the stock price typically falls heavily with a large number of investors selling.
Promoters typically use online bulletin boards, company websites or online forums to promote the stock and may even create false press releases to add legitimacy to their claims. The promoting usually involves a huge breakthrough for the company, such as the discovery of gold in a newfound area or a new technology that will revolutionize the product the company sells.
A ponzi scheme is an investment that offers high returns with little or no risk. The returns paid to investors (if any) are paid out through funds received by new investors, or from early investors own money. There is no legitimate investment, even though it usually is advertised as safe, legitimate and offering respectable returns.
This scheme relies on constant new investments as the new money is then paid back to the original investors, so when new investments stop – so do the ‘profits’ paid to investors. This causes the entire scheme to collapse and investors typically lose all or most of their original investment.
A pyramid scheme involves participants in the pyramid actively promoting the investment to make money by recruiting new investors. Similar to a ponzi scheme – there is no actual, legitimate investment. As new investors buy in, original investors move up the pyramid and receive a higher portion of the ‘profits’.
A pyramid scheme relies heavily on new investors and when new investments stop – the ‘profits’ paid to the earlier investors stop as well.
The main difference between a ponzi scheme and pyramid scheme is that a pyramid scheme involves early investors moving up the pyramid and receiving a higher percentage of the ‘profits’, whereas a ponzi scheme pays out ‘profits’ evenly to all investors.
Real Estate Investment Opportunities
With the rise of real estate prices in the past few decades, more and more people are looking at real estate as a long term investment opportunity.
Occasionally real estate seminars are advertised through the media that promote new ways to buy properties, finance properties, or generally make a large return on any real estate investment in a short amount of time.
Seminars sometimes offer a complimentary session that heavily promotes expensive products such as books, reports or the opportunity to join a real estate club.
Other seminars charge a hefty attendance fee for the opportunity to listen to guest speakers who have made significant amounts of money through real estate investing.
Some seminars offer the opportunity to invest in a specific real estate development but only for a limited time. This puts pressure on the potential buyers and doesn’t give them enough time to do their own research into the investment.
How to Avoid Investment Scams
Here are some basic tips on the best ways to avoid investment scams:
- For real estate investments, do your own research and analyze the investment using your own information. Avoid paying hefty fees for products that advertise claims that seem too good to be true. When in doubt – seek professional, external advice.
- Understand the risks involved before putting any money into an investment opportunity. Most schemes tend to downplay risk while emphasizing the potential returns – this should be a red flag.
- Double check with the securities commission or real estate council to see if the company involved is in fact legitimate. A quick google search is always a good idea too.
- Avoid making emotional decisions involving lots of money. Many investment schemes tend to skew the facts and rely on emotion to gain new investors. Always look at the numbers yourself and do your own research.
Remember – if something sounds too good to be true, it usually is.