IFYF Monthly Investing Messages

Personal Finance May 01, 2015 Print Friendly and PDF




Investing For Your Future Monthly Message

May 2015

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension


Red Flags of Investment Fraud


The Internet serves as an excellent tool for investors, allowing them to easily and inexpensively research investment opportunities. But the Internet is also an excellent tool for fraudsters. That's why you should always think twice before you invest your money in any opportunity that you learn about online.

Anyone can reach tens of thousands of people by building a web site, posting a message on an online message board, entering a discussion in a live "chat" room, or sending mass e-mails. It's easy for fraudsters to make their messages look real and credible and difficult for investors to tell the difference between fact and fiction.

It's common to see messages posted on the Internet that urge readers to buy a stock quickly. Cold callers often call using the same sort of pitch. Often the promoters will claim to have "inside" information about an impending development about a company’s stock. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose money.


Don’t be a victim!  Protect yourself by recognizing these red flags of investment fraud:


  • Suspicious Endorsements- Claims that an investment is recommended by a government agency such as the Federal Reserve or U.S. Securities and Exchange Commission.


  • Information Phishing- Phone calls or e-mails, claiming to be from an investment company, that request personal information (e.g., bank account and Social Security numbers).


  • “Current Events” Sales Pitches- References to legislation or economic trends such as new tax laws and high unemployment.


  • Sense of Urgency- Telltale phrases such as “limited time enrollment” or “you must sign up today” designed to get people to act quickly before they have a chance to talk with others or check out an investment.


  • Higher Than Average Returns- Fraudulent investment companies often hook people with higher returns that those that are currently available on investment products (e.g., 7% interest when CDs are paying 1%).


  • Evasive Answers- Salespeople sidestep specific questions about an investment and refer potential customers to vague and/or deceptive brochures or web sites.


  • Vague Identity- Companies do not provide full contact information, especially a physical location.


Follow your instincts.  The more red flags you observe, the more suspicious you should be about an investment. Does it sound too good to be true? If it does, it probably is. High-yield investments tend to involve extremely high risk. Never invest in an investment opportunity that promises "guaranteed" or "risk-free" returns and watch out for claims of astronomical yields in a short period of time.


Be skeptical of "offshore" or foreign investments and beware of exotic or unusual sounding investments. Also make sure you fully understand an investment before you part with your hard-earned money. Always ask for-and carefully read- a company's investment prospectus. You should also read the most recent reports the company has filed with its regulators and pay attention to the company's financial statements, particularly if they do not say they have been audited or certified by an accountant.


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