Investment scams have been around for as long as Wall Street has. We still hear about Ponzi schemes, which were common in the early 1900s. If you are an investor, fraud should be on your mind whenever you buy new securities or assets. Learn about ways to protect your investment portfolio, starting with the following:
Confirm the Legitimacy of the Business
If you see promising stock listed on a market index or even the pink sheets, don’t jump in and buy it right away. Before you start day trading, you need to research the business behind the securities. You should first confirm that the business entity is legitimate by looking up company registration numbers and addresses.
The company should also still be in business. Keep in mind that some scammers may use old business registration numbers to list stock under entities that have long since ceased to exist. While you are at it, find out for how long the company has been in operation. If the business was set up just weeks ago, that should set off an alarm.
It’s highly recommended that you contact the business or the organization to ask questions about legitimacy and confirm that you are dealing with an actual company.
Be Aware of Innate Biases Scammers Take Advantage of
Investors are remarkably biased, even if they don’t know it. Financial decisions are often subjected to a variety of preconceived notions due to either cognitive or emotional inclinations. Even if you don’t know it, scammers are pros at using these biases against investors.
For example, consider confirmation bias. It’s the type of bias that makes investors seek opinions that they agree with to affirm their own beliefs. Investors simply want others to confirm that they are about to make the right decisions. Scammers may use this bias to bombard investors with positive information regarding a security. You may start seeing chain emails, online videos, or quotes from influencers praising a particular type of stock, for example.
This type of propaganda-style information feeds into confirmation bias, causing investors to make a bad decision and play right into the hands of con artists. This is just one example of how a bias can be used against you. To protect yourself, be aware of these biases. Seek information from a variety of sources, instead of those that merely sound appealing to you, in order to support sound investment decisions.
Demand Evidence of Ownership
When buying an asset or a security from a third-party that claims to own it, do request proof of ownership. You could end up purchasing bogus securities if no proof of ownership is shown. This is particularly true of online deals. As a rule of thumb, don’t assume that brokers, sellers, or even businesses are what they claim to be.
Ignore Unsolicited Offers
Do you often come across emails that talk about supposedly great investment opportunities? If you receive pitches via email, social media, or any other channel for investing, assume that these are scams. Emailed promotions are a common tactic among pump-and-dump scammers. Remember that legitimate securities are never peddled online in this manner.
The SEC advises investors to ask questions and watch out for red flags when buying stocks and shares. Don’t fall for age-old tactics like “guaranteed” returns. As the saying goes, “if it sounds too good to be true, then it probably is”.