Guide To Securities Fraud : 5 Types Of Investment Fraud You Should Avoid
Being involved in an investment fraud is very common and also for being known as securities fraud, that is the practice of deceptively manipulating investors into investing in a certain business entity by way creating fictitious opportunities in order to make them believe that their investment will generate returns. Securities fraud can come in many forms : stock, bonds, commodities, currency and even real estate. In order to prevent yourself from falling victim to such investment fraud, it is best to know what kinds of securities frauds are out there and how they work so that you can be more careful with your choice of investments.
#1 Penny Stocks
Penny stocks are stocks of a business entity that trades at extremely low prices, usually any value under $5. These stocks are volatile in nature and seeing as their value is comparatively smaller than stocks from bigger, more established corporations, it is easier to coerce people into buying them with the promise that it will double or triple later.
The Problem With Stocks
One of the problem with such stocks is that they are so small in value that anyone with a huge cut of the stocks trying to commit investment fraud would be able to manipulate the stock prices to be much higher in order to convince people to invest in it. Once the momentum picks up, the fraudster sells their large portion of shares and cause the stock value to drop. This method of securities fraud is also known as pump and dump.
#2 Pyramid Schemes
These types of securities frauds are more well-known. Pyramid schemes are investment frauds, which seem similar to the style of multi-level-marketing, whereby investors are promised a huge positive turnover upon placing a small initial investment. The scheme starts with one person on the top of the pyramid and branches out to more people in the scheme, commonly known as “downlines”.
However, such schemes actually make money off each new person that they recruit, so the higher you are in the pyramid, the more money you make. And such schemes can die out easily, especially when it becomes difficult to recruit new members, leaving the founders rich and you end up losing your investment.
#3 Advance Fee Fraud
This version of investment fraud takes advantage on people who are new to trading stocks and make mistakes by buying low trading value stocks in high volumes. The fraudster will then approach you with the promise of buying your near-worthless stock dump from you, as long as you agree to pay a small, advance fee. Once you do, you will never hear from them about the deal or see your money again.
Another variation of this is an offer for an interest-free loan from an offshore bank. The targets for this are usually people looking for home or car loans. These so-called “interest-free loans” will usually involve a relatively small amount paid upfront as a “processing fee” but once paid, you will never see your loan or fee again.
#4 Ponzi Schemes
Ponzi schemes are when a fake business owner or a “hub” collects a joining fee from the new joiners in the scheme in order to pay off “investments” to the older members in the scheme. This is somewhat similar to the pyramid scheme but the main person who makes money off all the members of the scheme is the hub.
Such schemes usually start out as an investment into a budding new business, or a game-changing product. You will be enticed with promises of great returns, when in fact, it’s just another investment fraud.
#5 Stock Broker Scams
Some of these unscrupulous scammers pose as stock brokers and try to gain the trust of investors to allow them to trade in stocks on behalf of the investors. As a result, large amounts of money will exchange hands between the investor and the so-called stock broker, for the purpose of making trade decisions and stock purchase.
However, once the payment is finalized, the “stock broker” absconds with the money and is never seen again. In other cases, they remain, and trade in stocks, but in stocks that have no value to what you need. They may also have lots of hidden fees and charges, for every trade that they make for you.
Investments frauds are aplenty and we need to keep ourselves in the loop to know the latest MO of securities frauds that are happening in the trading scene. If you suspect that you stock broker may not be a legitimate one, our People Search will help you uncover the truth in no time.
Disclaimer:
The above is intended for informational purposes only and does not constitute a legal advice or specific recommendations in any way.
