Have you ever wondered how much money is lost to investment scams each year? In 2023 alone, reports to the FBI’s Internet Crime Complaint Center (IC3) showed a staggering 38% increase in losses related to investment fraud, with a total of $4.57 billion stolen from unsuspecting victims.

Investment fraud is when scammers lure individuals with promises of high returns and minimal risk, often using fake opportunities like stocks, cryptocurrency, or real estate to steal money. These schemes can be incredibly convincing, making it difficult to distinguish between a legitimate opportunity and a fraud.

Ready to stop scammers in their tracks and keep your money safe? Let’s make sure you’re never the next target! With a few quick tips and a sharp eye for those red flags, you’ll be dodging fraudsters like a pro.

Let’s explore how to safeguard your cash and outsmart those sneaky scammers!

What Are Investment Scams?

Investment scams are schemes where fraudsters promise high returns with little to no risk, hoping to lure you in with opportunities that sound too good to be true. They often dangle attractive investments like stocks, cryptocurrency, or real estate to grab your attention.

However, their goal isn’t to grow your wealth—it’s to take your money and disappear. Legitimate investments always involve some risk, and any offer that guarantees profits without risk should raise a red flag. Scammers also use urgency, pushing you to act fast, hoping you won’t think critically or do your homework.

More than 114,000 Americans fell victim to investment fraud in 2023, with total losses increasing by 25% compared to the previous year. The number of cases rose by nearly 6% year-on-year.

One common red flag is the promise of “guaranteed returns” or claims that you’ll make huge profits in a short time with little effort. No legitimate investment can offer a guarantee, and high returns usually come with high risks.

Scammers also make vague or confusing claims about how the investment works, using jargon to make it sound more complex than it is. If you don’t fully understand the investment or the process behind it, that’s a warning sign.

Common Types of Investment Scams

The median loss per victim of investment scams was $7,768 in 2023, much higher than the losses reported for other forms of fraud.

Before diving into the warning signs, it’s important to know the different types of investment scams that are out there:

  • Ponzi Schemes: This type of scam pays returns to earlier investors using the money from new investors. There’s no actual profit-making investment happening—it’s just a money shuffle.
  • Pyramid Schemes: Similar to Ponzi schemes, these involve recruiting others to invest. These scams rely on continuously bringing in new people, and once the recruitment stops, the scheme collapses.
  • Pump-and-Dump Scams: Fraudsters inflate the price of a stock by spreading false information. Once the price spikes, they sell their shares, leaving other investors with worthless stock.
  • Advance Fee Scams: You’re asked to pay upfront fees for an “investment opportunity” that never materializes.
  • Cryptocurrency Scams: Fraudsters promote new or unknown cryptocurrencies as the next big thing, but these digital currencies often vanish overnight.

Red Flags of Investment Scams

Spotting the red flags of an investment scam is your first line of defense. Here’s what to watch out for:

  • Guaranteed High Returns: No legitimate investment can guarantee profits, especially not sky-high returns like “double your money in a week.” If it sounds too good to be true, it likely is.
  • Pressure to Act Quickly: Scammers create a false sense of urgency. Whether it’s a “limited-time offer” or an “exclusive opportunity,” they don’t want you to think critically before handing over your money.
  • Unregistered Investments: Before investing, check if the opportunity is registered with your country’s securities regulator (like the SEC in the U.S.). If it’s not, that’s a big warning sign.
  • Lack of Transparency: Scammers will often avoid giving you clear answers about how the investment works or how they’re generating profits. If you can’t get detailed information, walk away.
  • Unlicensed Sellers: Always verify that the person or company offering the investment is licensed to do so. You can check databases like the Financial Industry Regulatory Authority (FINRA) to confirm legitimacy.
  • Complex or Confusing Investments: Fraudsters often use jargon or complex language to make an investment sound sophisticated. If you don’t understand how the investment works, don’t invest.
  • No Risk Involved: Every investment comes with some level of risk. Any claim of “no risk” is a sign that you’re dealing with a scam.

How to Perform Due Diligence Before Investing

Properly conducted due diligence significantly increases the chances of investment success. A survey found that 60% of failed investments were due to poor due diligence, particularly failing to uncover critical issues such as asset quality​.

Once you’ve spotted a potential investment opportunity, it’s crucial to conduct thorough due diligence before making a commitment. Here are some options:

  • Research the Company. Start by researching the company offering the investment. Look for online reviews, news articles, and discussions. Check their website and social media accounts for transparency in operations and past performance.
  • Verify Registration and Licensing. Make sure the company is registered with the relevant financial authority. For example, in the U.S., you can check the SEC’s EDGAR database to see if the company is properly registered. Licensing is equally important. You can use tools like FINRA’s BrokerCheck to verify if the person offering the investment is licensed.
  • Ask for Detailed Investment Materials. Request official documentation, such as prospectuses, and read them thoroughly. Be wary of any reluctance to provide documentation or overly simplified materials that gloss over risks.
  • Check Track Records. Look into the company’s past investments and performance history. Established firms should have a verifiable track record. If the company or individual has little to no history, consider it a red flag.
  • Understand the Fees and Charges. Legitimate investments will have clear, upfront fees associated with them. If fees are hidden or seem excessive, that could indicate an investment scam.
  • Consult with a Financial Professional. If you’re unsure about an investment, talk to a licensed financial advisor who can provide unbiased advice. They can help you evaluate the risks and decide if the opportunity is legitimate.

Common Tactics Used by Investment Fraudsters

Scammers are often skilled at manipulating emotions and using psychological tactics to lure investors in. Here are some common tactics used:

  • Affinity Fraud: Scammers target groups that you belong to, such as religious organizations, professional associations, or social clubs. They leverage trust within the community to promote fraudulent investments.
  • Promises of Insider Information: Some scams offer “exclusive” or “insider” information, making you feel like you’re getting in on a secret opportunity. Be wary—this is often a trick to lure you into a scheme.
  • Fake Endorsements: Scammers might use fake testimonials or claim that they are endorsed by celebrities, well-known companies, or government agencies to appear more credible.

What to Do if You’ve Been Scammed

The first step is to stop all payments immediately. If you’ve set up automatic payments or are committed to recurring fees, contact your bank or payment provider to halt these transactions. Freezing any future payments is essential to prevent further losses.

Next, report the scam to the relevant authorities in your country. In the U.S., for example, you can file a report with the Federal Trade Commission (FTC) or the Securities and Exchange Commission (SEC).

Informing your bank or credit card company is also necessary, as they might be able to help you reverse fraudulent transactions or prevent more unauthorized withdrawals. Many banks have fraud protection services that can help you recover lost funds.

While it’s natural to feel panicked, staying calm is important. Scammers often use fear tactics to rush victims into making poor decisions. Evaluate the situation, and avoid making hasty moves that could further complicate matters.

Be methodical in gathering evidence of the scam, such as transaction records and communications with the fraudster.

Finally, if you’ve lost significant money, consider seeking legal assistance. If applicable, consulting with a lawyer or financial fraud organization can guide how to pursue legal action or participate in class-action suits.

Specialized legal help may also assist in recovering your money, especially if the scam involves complex schemes like offshore accounts or cryptocurrency fraud. Taking these steps promptly increases your chances of minimizing your losses and possibly recovering some of your funds.

Tips to Protect Yourself from Investment Scams

To stay safe from fraudulent investment schemes, here are some tips to keep in mind:

  • Stay Informed: Continuously educate yourself about the investment world, including the latest trends and common fraud tactics. Subscribe to trusted financial news sources and follow updates from financial regulators to stay ahead of scams.
  • Use Reputable Investment Platforms: Only use platforms with proven track records and ensure they are regulated by government bodies like the SEC in the U.S. Check online reviews, verify the company’s registration, and ensure they comply with financial regulations.
  • Be Skeptical of Promises of Guaranteed Returns: No investment can offer guaranteed profits without risk. High-return promises, especially those claiming little to no risk, should raise red flags immediately.
  • Beware of Pressure Tactics: Scammers often use urgency, such as limited-time offers or exclusive deals, to rush you into making a decision. Take your time and never make investment decisions under pressure.
  • Research the People Involved: Always investigate the background of the people behind an investment offer. Look for any legal actions, complaints, or regulatory warnings related to them.
  • Ask Questions and Get Clear Answers: Legitimate investments come with clear, detailed information. If the details are vague or if you can’t get straightforward answers to your questions, it’s a sign to walk away.
  • Beware of Unsolicited Offers: Be cautious of investment offers that arrive unexpectedly through email, phone calls, or social media. Scammers often target people using these unsolicited methods.
  • Watch Out for Unregistered Investments: Ensure that the investment opportunity is registered with appropriate regulatory bodies. Unregistered investments lack transparency and could be fraudulent.
  • Monitor Your Accounts: Regularly review your financial statements and account activities. Being proactive can help you spot any unauthorized transactions or unusual activity early on.
  • Report Suspicious Activities: If you suspect a scam, report it to your local financial authority or consumer protection agencies. This helps protect not only you but also others who might be targeted.

The Takeaway

Avoiding investment scams doesn’t have to feel like a chore—it’s all about staying smart and being a bit of a detective. If you keep your eyes open, trust your gut, and do your research, you’ll be way ahead of the game.

Think of it like this: every time you pass on a shady deal, you’re winning. And who doesn’t love a win, right?

So, grab a cup of coffee, dive into those investment plans with confidence, and always, always double-check before you leap!

Now, go out there and protect your cash like the savvy investor you are. Share this guide with friends—let’s all stay scam-free!