While the financial industry is highly regulated, the unfortunate reality is that there are still scammers out there that try to defraud people out of their hard-earned money. To prevent you from falling victim, here are three common scams to look out for.
The unfortunate reality is there are scammers who try to defraud people.
1. Ponzi schemes
One of the most common financial scams is the so-called Ponzi scheme. Ponzi schemes are named after its inventor Charles Ponzi who guaranteed investors in his scheme a 50% profit within 45 days in the 1920s. However, instead of investing his investors’ money he simply paid off earlier investors with new money coming in from new investors. Unfortunately, this type of investment scheme still exists today.
To avoid falling for a Ponzi scheme, always ensure the investment company you are dealing with is regulated and run by reputable individuals. If there is little to no information about the firm’s owners, however, that is a clear red flag. Also, the promise of very high monthly returns should also ring your alarm bells.
2. Pyramid schemes
Another common financial scam is the pyramid scheme. Pyramid schemes in the financial investing space function somewhat similar to Ponzi schemes with the difference being that individual investors in the scheme are encouraged to onboard new investors for which they then receive a commission.
If you come across an investment scheme that offers very high returns and a commission for recruiting new investors, that is a sign that you might be dealing with a fraudulent company that employs a pyramid scheme system.
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3. Pump and dump schemes
The so-called pump and dump scheme is another financial scam to be aware of. Pump and dump schemes involve the promotion of a small company’s shares using aggressive telephone sales tactics to drive up the share price. Once the stock has hit a certain target price, the culprits sell their shares, which they bought before promoting the stock at which point the stock price collapses and investors lose their money.
If someone calls you to sell you shares in a small company, that is a sign that you might be being contacted by pump and dump scheme operators. In that instance, it is best to simply hang up.
Generally speaking, it is quite easy to avoid falling for a financial scam if you remember the old adage “if something sounds too good to be true, it probably is.” If you want to invest your money, choose the guidance of reputable investment companies that can help you make the right investment choices.