The rising cases of investment scams have made investors skeptical about investing in financial markets. The question is what should one look out for before investing to protect themselves?
You can easily fall for an investment scam, whether you are experienced or not. We are here to equip you with knowledge on how to identify them through Investable, an online course put together by Moneywise and Africa’s Pocket to help you invest with confidence. We give you a step by step guide to build an investment plan that aligns to your goals!
How Investment Scams Trip Us Up
Fraudsters tend to be eloquent and well enlightened about financial matters and you can barely suspect them. They also have compelling testimonials, resources, and glossy websites that make us trust them. They will throw you a once-in-a-lifetime opportunity to invest with them and the opportunities are usually very attractive.
Usually, the investment plan comes with requirements to act quickly. Using convincing words, the fraudsters will make you believe the investment will bring excellent returns with little to no risks.
3 Most Common Investment Scams
Investment fraud is becoming quite common, making it challenging to distinguish genuine investment opportunities from scams. Below are some of the common types of investment scams that you are likely to come across as an investor:
- Pyramid Schemes
A pyramid scheme is a fraudulent system in which investors are meant to make money by recruiting other investors, who are also expected to recruit more investors, and the cycle continues endlessly. Many people confuse pyramid schemes for legitimate multi-level companies. Well, the difference between the two is subtle; a pyramid scheme is set up to collect funds from unsuspecting investors and there is no real underlying business ( they’re destined to fail) while a legitimate multi-level marketing (MLM) company has a legitimate business that uses the MLM structure as a sales strategy.
Pyramid schemes may or may not involve the sale of products. However, some of them could incorporate the sale of products or distributorships in an attempt to make the investment look legitimate.
How do you identify a pyramid scheme and avoid losing your money? Here are the warning signs:
- Recruiting more investors is more important than selling products
- Investors have to pay a fee before they can start selling the company’s products or recruiting other investors
- The products to be sold are difficult to sell.
2. Ponzi Schemes
Ponzi schemes are investment scams that rely on new investors’ funds to pay existing investors. The fraudsters promise to invest their funds in opportunities such as FOREX, Cryptocurrency, Real Estate, and so on and repay it in a relatively short period with little to no risks. However, most of these predators don’t invest your money. Instead, they use it to pay existing investors and keep the rest to themselves.
Ponzi schemes require the constant recruitment of investors to survive. Ponzi schemes will collapse as soon as the fraudsters cannot attract new investors. The schemes also collapse if a large number of existing investors cash out.
Here is what you need to watch out for:
- Guaranteed investment opportunity with very high returns but little to no risks involved
- Overly positive returns that are regularly consistent regardless of the overall market fluctuations
- Investments that are not registered with state regulators
- Scanty information about the founders and directors
- Complicated investments that that are difficult to understand
- Account statement errors. This could be a sign that your money was not invested as promised
- Difficulties in cashing out
2. Pump and Dump Schemes
These schemes are manipulative, and not so easy to suspect. Scammers buy low-priced shares from a small thinly-traded company listed on a stock exchange, with low liquidity. They then spread false, exaggerated, or misleading information regarding the shares to increase their stock price. Unsuspecting investors get excited and believe the stock has promising prospects, and then rush to buy causing an increasing demand, and the stock price rises.
Once this happens, the fraudsters sell their shares at very prices and vanish while the stock price drops suddenly due to lack of demand.
Warning signs of a pump and dump scheme include:
- Receiving unsolicited emails about a particular stock
- Skyrocketing prices of certain stocks without clear reasons such as improvement in earnings, issuance of dividends, or other material information;
- A sudden increase in the volume of the stock when it has previously been thinly traded; or
- Stocks are being promoted highly on social media and online messaging boards on popular portals that discuss investing in the stock market.
How to Protect Yourself
- Ask questions
Not expecting you to investigate, fraudsters are put off when you dig deep without relying on their information and references. Some questions you can ask are:
- How do you make money?
- Can I see your audited accounts for the last 3 years?
- Who is on your board?
- How are you able to generate such consistent returns in a turbulent market?
- Do your own due diligence
Avoid relying solely on the company’s website, emails, and postings on internet forums. Seek to clearly understand the business and its products and services and stay away if the deal seems too good to be true. There will never be an investment with high returns and yet with no or very low risk.
- Take time to conduct a background check on the individual selling the investment. Are they licensed as a financial advisor, or do they have expertise and experience? Also check whether their firm has had serious disciplinary action taken by regulators. The Capital Markets Authority Kenya website would help with this.
- Speak to an independent financial advisor that is not related to the deal and get their thoughts.
- Only invest when you understand the investment opportunity and understand the risk you are taking.
We must invest. However, take time to make investment decisions that are aligned to your goals, and your circumstances, such as age, risk appetite, current income and assets, your family set up, knowledge and expertise, and so on. Investable gives you a step by step guide on how to do this!
Begin your investing journey today by downloading our Ultimate Guide to Investing , which gives you pointers on how to build an investment plan that puts you in control of your financial security.