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How Investment Scams Work


Avoiding Investment Scams
William Clark and his wife were victims of financial-planning fraud.
William Clark and his wife were victims of financial-planning fraud.
Time & Life Pictures/Getty Images

Here are some tips to help you steer clear of investment scams.

  • Don't judge a book by its cover. Salespeople are trained to be professional and charismatic. Con artists are salespeople, too; they just happen to also be criminals. They depend on you to be polite and to not interrupt them, hang up on them or delete their email.
  • Educate yourself. Scams succeed mostly with people who have little investment experience or knowledge. Consult a professional financial adviser. Consult your friends and family. While you're starry-eyed with the potential profit at your fingertips, others are more likely to have an objective viewpoint.
  • Trust only professional, licensed brokers and sales agents.
  • Don't trust "top-secret insider information" and "hot tips."
  • Don't rush to invest after receiving a single phone call, attending a single seminar, or meeting with the salesperson a single time. However exciting the prospect may be, do not "act now" or "act before it's too late."
  • Ask the salesperson for a prospectus, a breakdown of the investment's procedures, risks and potential.
  • Don't trust the "high returns, no risk" guarantee. An investment is a risk, just like playing roulette (but hopefully with better odds). No investment is a sure thing.
  • Don't trust a salesperson who tells you not to tell anyone about the investment. Always question "secret" investment opportunities.
  • Research every investment opportunity. Investigate the company, the product, the security, and/or the stock. Use resources available at the Financial Industry Regulatory Authority and the Securities and Exchange Commission to investigate the company and/or salesperson. If you are thinking of investing in a company not registered with the SEC, make sure you conduct a thorough background check on the company.
  • Take extra precautions when presented with an overseas investment opportunity.
  • Steer clear of opportunities that claim to be tax-free investments. Investment returns, like all legitimate ways to make money, are subject to taxes.
  • When you make an investment, make the check payable to a company, never an individual salesperson.
  • After making an investment, examine your investment reports and make sure no unauthorized transactions are being conducted.
  • Ask questions of your adviser/broker/sales agent. Get answers. If your financial adviser or broker is slow to respond, gives vague answers, or denies your requests to withdraw money from the investment when you have a right to do so, contact the authorities.
  • Don't sign anything you don't understand. Have a lawyer review any contracts you are asked to sign.
  • Be wary of very quick returns on an investment. Scammers often lure cautious investors by sending a few small payments early on to encourage them to invest more.

If you are the victim of a scam, the best thing you can do is report it. Scammers depend on your uncertainty and embarrassment at being swindled to keep the scam going. Don't be embarrassed -- even the best get taken. If there's a time not to sit around and feel ashamed, it's when you suspect you're getting robbed blind.

If you'd like to learn more about investment scams, you can follow the links on the next page.