A Guide to Recognizing Investment Fraud

Investment Fraud

Investors know that making investment decisions involves certain risks. However, novice investors often think that they are primarily associated with the uncertainty of the market situation. A thriving company, which today seems to be one of the leaders in its niche, may turn out to be bankrupt tomorrow. And then its shares will turn into useless pieces of paper since the bankrupt company will simply cancel them. However, among the risks natural to a market economy, there is another group of vicissitudes that beginners may encounter. It concerns investment fraud, which takes many forms. It is not always easy to distinguish cheating since scammers are inventive and come up with new schemes to replace those exposed. To avoid getting hooked, a novice investor must learn to recognize the warning signs that they are about to be scammed.

How Investment Fraud Works?

Investment fraud is a type of illegal activity aimed at deceiving investors to obtain their funds. The easiest way for swindlers to deceive people who have little understanding of economics and finance. They will not be able to distinguish losses due to a delayed reaction to market signals from losses due to deliberate deception.

Market fluctuations are natural processes in a market economy. They allow you to make money on the difference in prices for buying and selling stocks, bonds, currencies, and other financial instruments. However, these fluctuations can also serve as a kind of fog behind which scammers hide. They will convince their victims that the loss of their capital is caused by difficulties in predicting market reversals rather than by their tricks. Therefore, when embarking on the path of an investor, be prepared to meet financial scammers as an expert who instantly reveals all their dishonest schemes.

Why a Person May Become a Victim of Investment Fraud?

Superficial Knowledge of Investing Principles

Fraudsters primarily target novice investors who tend to trust experts. Crooks are cautious, and if they see that investors can unmask them thanks to their deep knowledge, they try to avoid such experts. To be more convincing and presentable, scammers can rent expensive offices in the city center and surround themselves with business bustle. To an outsider, this may seem like evidence of the natural activity of a thriving consulting company, but, in fact, it is a bait that should lull your vigilance. Therefore, studying financial and business disciplines will become your natural immunity against scammers, as this knowledge will help you expose their deception.

Difficult Financial Situation

People who are in an unfavorable financial situation dream of finding an effective way to get out of it. Investing can be such a method if you understand the markets and make an active effort to deepen your knowledge. But often, a person hopes for a miracle and, therefore, is inclined to trust those who promise it. 

So, crooks often take advantage of the investor’s desire to believe in miracles and offer them fabulous profits. As a result, in most cases, this all turns out to be a fabulous deception. And instead of getting out of this negative financial situation, the person worsens it even more. To protect yourself from this, stick to the principle of reality and do not be fooled by the promise of profits that are much higher than the market average. If you urgently need money, it’s better to take it from reliable lenders by comparing their conditions at Payday Depot. When you don’t have such an urgent need for money, it will be harder for investment scammers to deceive you.

Excessive Information on Social Networks

Fraudsters are proficient not only in financial sciences but also in psychology. They have excellent skills in social engineering and know which emotions to provoke to evoke the reaction they need. Therefore, they study the behavior of their future victims on social networks to make them a customized offer:

  • If they see that a person is concerned about the fate of wild animals, they will suggest investing in some non-existent fund that saves endangered species.
  • If they discover that a person is interested in art and antiques, they will have a special offer for investing in the art market.
  • If you make reposts about the severity of the threat of climate change, you will be advised to invest in new advanced technologies for recycling plastic.

Therefore, excessive knowledge about your preferences and hobbies from investment consultants and experts should alert you. A true investment expert won’t crawl through your social media profiles to get a detailed picture of your values. They will ask you directly which type of company you prefer to invest in. And if you see that you are being seduced by things that are important to you, this is a clear sign of a meeting with scammers.

Trust in Public Figures

Fraudsters often use public figures in their masquerade to inspire trust in investors. These could be government or law enforcement officials, opinion leaders, athletes, and even celebrities. When you enter the offices of such scammers, you will see many photographs on the walls in which your investment advisor or broker is hugging the people you saw on the TV screen. The natural reaction that most people will have is to respect the expert who is so familiar with outstanding people. But in fact, this is a high-quality fake, which is designed to emotionally overwhelm you with the greatness of the expert and make you trust fraudsters.

Tactics That Crooks Use to Scam Investors

Creating a Sense of Urgency

Scammers need to make sure that you do not have time to think or advise with friends. Therefore, they will rush you into making a decision. As a rule, they say that if you miss this profitable opportunity now, you will not be able to conclude such a profitable deal tomorrow. They may deliberately create conditions of turmoil and chaos to force you to act quickly and without thinking.

Promise of Astronomical Profits

Before giving away your money, carefully study the market to determine what average profit you can get by investing in a particular financial instrument. Of course, try to find a better offer, but don’t let yourself be tempted by unrealistic promises. Your anchor should be the average profit, and if you are promised too much, question the integrity of that consultant or broker.

Avoiding Direct Written Responses

An honest company will always be willing to provide you with written answers for further consideration. Fraudulent companies seek to minimize written information for many reasons:

  • You can read into the details and understand that you are being deceived. 
  • Perhaps you will show these documents to your more knowledgeable friends to ask for their advice. And with their expert knowledge, they will immediately expose the scammers.
  • Additionally, these documents can be used against them in court.

Therefore, if you see that all information is given to you mainly during personal communications and your request for written answers is refused, this is also a warning sign.

Too Complex Investment Strategies

To confuse you and avoid answering, scammers may offer overly complex investment schemes:

  • On the one hand, investors can very quickly get confused by swindlers’ vague explanations. Without wanting to show that they don’t understand anything, investors will simply agree with the quasi-expert explanations of the scammers.
  • On the other hand, complex schemes may be an excuse for scammers not to reveal all the details to you. They supposedly can only be understood by a person who is well-versed in finance and investments. By putting the investor in the position of a narrow-minded person, they strengthen their authority and quickly force novice investors to make an unfavorable deal.

Additional Measures to Protect Yourself from Fraudsters

Knowing about the tricks of scammers, you can expose them and avoid losses. However, even if you have no direct evidence of their dishonesty but only vague feelings or concerns, stop the deal. Check information about these intermediaries in special investment fraud databases and also look at reviews of their former clients on the Internet. At the beginning of your investment experience, try to get the support of acquaintances or friends who have already successfully made a profit through investing.

If you are still unlucky and the deception has taken place, do not be ashamed of it, trying to hide this fact from everyone. File a complaint with law enforcement to stop the scammers and try to get your money back. Moreover, do this as soon as possible after you realize that you have become a victim of deception. Scammers often wind down their activities and disappear after they have collected enough funds from inexperienced investors. Therefore, the sooner you report the crime they committed, the greater the chance of catching them. 

Remember that scammers are just foam on the surface of the water. Real investing is an extremely exciting activity that can give you significant capital gains. But to confidently follow the path of investing, you need to distinguish scammers who are trying to prevent you from making profits and directing it into their pockets.