Financial Trading Scams To Avoid
With low interest rates making saving a non-starter, investors are increasingly turning to the stock market to try to make some money on their spare cash. This can be a great strategy for savvy investors who follow the advice of their accountants before taking the plunge. However, many people fall foul of one of the many scams that are operating.
Here are two of the most commonly used investment scams you really should be aware of.
Ponzi schemes
This is one of the oldest and most widely used stock scams around today. A company (usually a false front) offers investors very high profits for a short time period in exchange for a relatively small investment. In the beginning, the scheme will use the money from new investors to repay old ones. The original investors will then be solicited for further cash with the promise of even greater returns. As soon as a large sum has been extracted from several investors, the company and its owner will vanish into thin air taking the invested funds with them.
How to spot a Ponzi scheme
Any legitimate business, especially a new one, will never offer short-term returns and even if it did, the returns will be very low indeed. Payments will be inconsistent whilst the company finds its footing in the market. Ponzi stock scams make high initial payments on a very regular schedule. Pointers to look out for are high returns, consistent payment structure and a weak or non-existent company history.
Bait and switch
This is another of the 'oldie but goodie' scams. Clients are offered a relatively cheap investment in securities or bonds. Their investment is then placed into a different, more expensive investment opportunity. This money is then used to artificially inflate a different company's price for use in one of the other stock scams mentioned above.
How to spot a bait and switch
These schemes can be really hard to spot because the broker basically uses a false business to lure in investors. They select a cheap investment from a reputable company so that investors don't smell a rat. Once the money is secured, it's moved to a less desirable company.
In conclusion
These are just a couple of the most commonly used scams out there. The key to avoiding the pitfalls is to do your research thoroughly and remember the time-honoured saying: if something sounds too good to be true, it usually is. Unless you are an experienced trader, you are strongly advised to discuss potential investment opportunities with your accountant and take their advice on the best place to invest your money.
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