Avoiding Investment Scams: Red Flags to Watch Out For

This was originally posted on Planner Bee.

Are you able to identify common investment scams and protect yourself from them?

Investing your money can be a rewarding way to achieve your financial goals, but it also comes with risks. One significant risk involves becoming a target of scams that purportedly guarantee substantial returns with minimal or no risk, only to be cheated and depleted of all your funds.

Losing your hard-earned money to financial scams is a concern that haunts even the most seasoned investors. In a world where lucrative deals and deceptive ploys coexist, telling them apart isn’t always easy.

In this article, we will explore some common signs and strategies of investment fraudsters, and how you can avoid becoming a potential victim by protecting yourself against scams that could hijack your financial dreams.

Common investment scams

In the ever-evolving realm of investments, fraudsters are constantly devising new and creative schemes to exploit unsuspecting individuals. While the list is extensive and scams vary in sophistication, here are some common scams to help you navigate the financial terrain with caution.

Advancement fee scam

As the name suggests, a victim is persuaded to pay money upfront to take advantage of an offer that promises significantly more in return. These advance payments are described as fees, taxes, commissions, or incidental expenses. They are also often portrayed as monies that will be returned at a later stage. However, the catch is that once the scammers receive the money, the victim will never hear from them again.

These schemes often target investors who may have previously put money into underperforming securities or have experienced losses in other investment ventures. They would be enticed to make up their losses with the offer on the table, but a “refundable” fee, deposit or tax must first be paid.

Forex scam

The forex market is the world’s largest and most liquid financial market and attracts investors seeking to profit from currency exchange rate fluctuations. Despite its potential for profit, trading in foreign currencies carries inherent risks.

Scammers exploit these risks and often use deceptive forex ads by falsely advertising simple market access through courses or software. Certain forex trading schemes, notably those run by unregulated entities operating beyond regulatory boundaries, may even involve illegal or fraudulent activities.

A popular modern variant of this scam is the signal seller. Fraudsters will claim that they can identify favourable opportunities to buy or sell a currency pair. Some might even get testimonials from people to up their credibility. Regrettably, many of these scammers merely pocket the funds and vanish, leaving investors deceived and empty-handed.

Offshore investing scam

There is a fine line between frugality and imprudence.

In this particular scam, individuals are lured by promises of significant profits by sending their money “offshore” to reduce taxes or fees. Apart from the legal implications of evading taxes, offshore investments bring unnecessary risks. It might be impossible to recover your money should something go wrong after you have moved your funds to another country.

Ponzi/Pyramid scheme

Named after Charles Ponzi, the infamous Ponzi or pyramid scheme is a deceptive financial practice that draws investors with the promises of substantial returns.

It operates on a foundation of false profitability, where early investors receive returns funded by the contributions of new participants. However, once recruitment slows and new investments decline, the scheme collapses, leaving later investors with significant financial losses.

A distinctive telltale sign of a potential Ponzi scheme is incentivised recruitment, in which a person is promised additional rewards for bringing new participants. This recruitment-focused structure is unsustainable and indicative of a fraudulent operation.

Pump and dump scheme

In this deceptive practice, scammers promote enticing deals on low-priced stocks to potential investors while concealing their ownership of a significant portion of the stock. As more investors buy in, the stock’s value artificially inflates. Once the value of the stocks peak, the scammer sells their shares, causing the stock value to plummet, leaving investors with worthless holdings.

Red flags and warning signs

As you navigate the complex terrain of investment opportunities, it’s crucial to be vigilant for red flags and warning signs that may indicate potential scams.

Understanding these indicators can empower you to make informed decisions and protect your investments from deceptive schemes.

1. Unbelievable returns: Be sceptical about investments that promise consistently high returns with minimal or no risk. All investments carry some form of risk.
2. Lack of transparency: Fraudsters often provide vague or incomplete information about the investment strategy in the hopes of confusing potential victims.
3. Difficult to verify information: Investors should be able to independently verify information provided about an investment. If the scheme discourages or makes it difficult to conduct due diligence, it is a warning sign.
4. Pressure tactics: Any credible investment expert would refrain from urging you to make an instant decision on investment or insist that you must “act now.” It is generally advisable to avoid individuals who pressure you into deciding on a stock sale or purchase.
5. Unsolicited offers: Exercise caution when encountering unsolicited investment opportunities through cold calls, emails, or social media.

Learning from past scams

In 2022, scam victims in Singapore faced escalating losses that reached S$660.7 million, a notable surge from the $632 million reported in the previous year. Of these losses, investment scams emerged as the leading contributor, amounting to S$198.3 million.

One instance involved fraudsters impersonating economist Tan Khee Giap, using social media and WhatsApp to provide bogus investment tips on gold, futures, and foreign currencies.

Victims were directed to a fraudulent online investment platform, where one individual invested S$25,000, supposedly doubling her money. However, upon attempting a partial withdrawal, she faced rejection and was coerced into paying a 10% “handling fee” of S$2,477, after which the scammers became uncontactable.

How to protect yourself

As the saying goes: prevention is better than cure. Here are some strategies to protect yourself and prevent falling victim to investment scams:

Educate yourself

Stay informed about various investment instruments and be aware of common investment scams. Understanding the basics of legitimate investment practices will empower you to discern between genuine opportunities and potential pitfalls.

Be sceptical

If an investment promises unusually high returns with little or no risk, exercise caution. Remember the adage: “If it sounds too good to be true, it probably is.” Conduct thorough research and question the legitimacy of such enticing propositions.

Conduct due diligence

Prioritise in-depth research before committing funds. Verify the credentials of those offering the investment. If the information you request is provided by the firm, cross-check against other sources to validate the credibility. You should also check if the activities are regulated by the Monetary Authority of Singapore (MAS). Reliable information is your best defence against fraudulent schemes.

Diversify your portfolio

Spreading your investments across different asset classes helps mitigate risk. Diversification not only safeguards against losses in a specific sector but also reduces the impact of a potential scam on your overall portfolio.

Conclusion

The scams discussed in this article represent just a fraction of the prevalent schemes targeting unsuspecting investors. As the investment landscape evolves, so do the tactics employed by scammers. In moments of uncertainty, never hesitate to ask questions and seek clarification.

Always bear this in mind the timeless: if something sounds too good to be true, it likely is.