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How Investment Scams Work


Top 10 Investment Scams
Victims of a stamp scam in Spain worry about regaining their money.
Victims of a stamp scam in Spain worry about regaining their money.
PEDRO ARMESTRE/AFP/Getty Images

Investment scams come in all shapes and sizes. Con artists often mix and match features of various scams to concoct a swindle that is hard to detect.

Below are descriptions of 10 common scams.

Affinity Scams

For better or worse, humans have a tendency to listen to people with whom they have something in common. Scammers depend on this trait. They join hobbyist groups and religious groups, or trade on ethnic similarities.

Unlicensed Sales

Unlicensed brokers or sales agents approach you with financial advice or an investment opportunity. An unlicensed insurance agent might sell fake insurance policies. Or, worse, you could seek advice from an unlicensed broker at a disreputable firm.

The Ponzi Scheme

The Ponzi money-shifting scheme consists of paying initial investors with the funds provided by later investors. As in affinity scams, Ponzi scammers often target groups of people. Since these schemes rely on trust and word of mouth, initiating the scam in a group allows the con artist to spread it quickly.

Internet Scams

Internet scams include e-mail offers and spurious Web sites promoting investment opportunities in nonexistent companies or products. Chat rooms, newsgroups and bulletin boards are also common playgrounds for con artists. Schemers use multiple user names to endorse the company with false testimonials, creating the illusion of legitimacy.

Promissory Note Scams

A promissory note is a written agreement to pay back a loan with a certain amount of interest. Scammers offer an opportunity to invest in high-yield promissory notes, which work much like bonds. But the scammer never actually loans money to a third party. He simply takes the investor's money. Or he does make the loan, but he pays the investor less than promised.

Prime Bank Scams

The fraudster offers investment opportunities through "prime banks," overseas institutions normally accessible only to the upper crust of society. Unfortunately, these banks don't exist.

Unsuitable Investments

Fakers recommend investments that aren't suitable to the investor's financial situation. A common variation is the long-term investment pushed on someone for whom a short-term investment would be better.

Senior Scams

Seniors often live alone, depend on others for care and worry about how their retirement savings will support them. Many seniors are eager to believe the confident man who can dispel these fears with his sound advice and exciting opportunities. These scams include life insurance fraud and unsuitable investments.

Commodity Scams

These schemes include investments in gold, silver, rare coins and gems. Con artists have recently capitalized on the political circumstances that have driven up the cost of oil and natural gas. The same circumstances make investments in alternative energy quite attractive. Just because it sounds good for the environment doesn't mean it can't be a scam.

Investment Seminars

The scammer invites a hundred people to a seminar, where she presents an unbeatable investment opportunity. You must sign up right then and there. You can't sign up later because she is leaving town in two hours. So is your money.

Why do these schemes work? Unfortunately, our instincts sometimes work against us. Learn more on the next page.