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How to tell a truly amazing investment from one that’s merely a scam

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It won’t ever happen to you, right? Wrong! It’s much easier than you think for crooks to con you out of your hard earned money if you let your guard down.

Investment scams come in many forms. The people who run these scams range from crude and clumsy to the highly polished; the latter bunch wrapping their con games in such an air of legitimacy that it’s hard for you to recognise the truth.

Guaranteeing 15% growth? Smell the fish!

“An investment in shares is the most lucrative one you can make over the long-term,” says Ingram. “For the last 114 years the South African stock market gave you up to 15 percent a year. So you need to ask some serious question if anything guarantees you more than 15 percent.

“If the stock market is the best form of investment; how on earth can anything give you a linear return that’s way more than what the market offers?” asks Ingram. “If they do then you’re taking way more risk than you think to secure that guaranteed return. Prepare to lose money,” warns Ingram.

More warnings signs to take note of:

  • Any investment supposedly exclusively available to just a few people.

  • Any investment pitch that create a sense of urgency. (i.e. claims that the opportunity may not last long or that you must get in now)

  • Any investment that can’t show proof that it’s operating in the framework of the regulatory environment.

Five types of investments scams to look out for

According to the National American Securities Administrators Association (NASAA), there are five main “types” of investment scams you must look out for:

1. Off the book deals

This is a deal your broker or financial advisor will pitch to you that isn’t supervised by their employers and is, more often than not, illegal. Since no record of the deal is ever kept, you won’t be able to prove you lost the money in the first place.

2. Ponzi schemes

These act like pyramid schemes. Money from new investors is used to provide returns for investors higher up the ladder. When the scheme collapses (and it always does) only those at the very top of the pyramid make a profit. Anyone who’s bought in after that will suffer huge losses.

3. Affinity fraud

Perfected by the infamous Bernie Madoff, affinity fraud takes place when a scam artist targets respected members of a community (such as church leaders or golf club members) with an investment product. Once more and more members climb aboard, the scammer simply disappears – with your money in tow.

4. Unlicensed individuals selling securities

This is where an independent insurance broker will approach you to invest in a legitimate investment opportunity. Since the con artist isn’t licensed, he simply pockets the money and you get nothing in return.

5. Pump and dump schemes

This is what happens when a small group of “in-the-know” investors buy a share before they recommend it to other investors. This results in a sharp spike in the share price. At this stage, the “in-the-know” investors dump their shares at the higher price, creating a sharp dip in the share price.

Article by Sithandwa Ngwetsheni

(Edited by Kabous le Roux)

(Click here for more personal finance articles such as this one.)


This article first appeared on 702 : How to tell a truly amazing investment from one that’s merely a scam


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