5 Types of Investment Fraud and How to Avoid Them

Rohan Mathew

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In This Article, We Are Going To List 5 Types of Investment Fraud and How to Avoid Them

As a business owner, you must protect yourself from investment fraud. Research has shown that 10% of investors fall prey to deceptive practices that end up in massive losses. In order to protect yourself and your money, you need to know how investment fraud works and what the most common types are. If you suspect that you might be targeted by fake investors, make sure you seek the help of an investment fraud attorney.

What Is Investment Fraud?

Investment fraud is a term that combines a wide variety of schemes that aim to scam you into risky or non-existent investment opportunities. Some of the biggest investment frauds involve real estate, stocks, and bonds. Scammers lure you with promises of low-risk investments with guaranteed yield or constant returns.

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People who engage in investment fraud range from financial advisors to members of your own social circle. While anyone could be a victim, crooks tend to target people who are more likely to fall for the scheme. A good portion of investment fraud in the USA involves elderly people with large savings. In other cases, like the famous Jay Peak investment fraud, the target are immigrants seeking green cards.

What Are The Most Common Types of Investment Fraud?

While con artists tend to be creative in their schemes, there are several classic methods that are still in use. While there is an international scammer list that can be used for reference, it is far from complete. You need to be able to recognize the following types of investment fraud and report them to the authorities.

Pyramid Scheme

In this scam, the con artist promises huge profits within a short period of time, in exchange for a small initial investment. You make money by recruiting other people into the same program, making the whole thing seem like a legit multi-level marketing plan. However, you will soon find it impossible to get more people to sign up, and the scheme will quickly fall apart. In the end, you lose your initial investment.

Usually, an investment pyramid scheme is easy to detect and avoid. Get-rich-quick schemes are never what they claim to be.

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Pump-and-Dump Scheme

In this scheme, the crook buys low-priced shares in a small company. After that, they start spreading false information meant to trump up the stock price by increasing interest in it. As a result, demand greatly increases and people believe they are getting a good deal, so they start buying. The crook then sells all its stock at a high price and disappears.

Investors remain with practically worthless stock and a huge money loss. Always be wary of people who claim to have “insider information” and try to sell you stock online.


Ponzi Schemes

This scheme involves a person taking money from new investors in order to pay the promised returns of old ones. In order for the scheme to continue, the con artists need to constantly recruit new people. Such schemes eventually collapse, often due to a lack of new victims or uncertain economic times. Once that happens, involved parties tend to lose all the money they invested.

Bernie Madoff, an investment advisor, managed to execute the biggest Ponzi scheme in history. He scammed tens of billions of dollars from thousands of investors over the course of 17 years.

Pre-IPO Investment Fraud

In this scheme, you receive the chance to buy exclusive stock in a company that is not traded publicly yet. However, the company never goes public or the person who approached you happens not to be related to it at all. Such scams are known to happen before the public launches of big companies.

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Such investments are high-risk ventures. If you are given an offer like this, consider seeking the services of an investment fraud lawyer.

Advance Fee Fraud

This common type of investment fraud involves you getting an offer to sell a cheap stock at a very high price. The catch is that you have to pay some sort of fee. Of course, once you do, you never hear from the person again, and your cash is lost. This scheme prays on people who regret a bad stock purchase and are looking for a way to make up for their loss.

How to Avoid Investment Fraud

When it comes to detecting investment fraud, the rule of thumb is to always be skeptical of the so-called “golden deals.” Beware of over-the-top sales pitches and phrases like “limited-time offer,” “guaranteed returns,” and “insider information.” Here are a few things to keep in mind if you want to protect yourself from scams.

  • Require detailed terms and conditions on any investment opportunity
  • Consider over-the-top sites a huge warning sign
  • Ignore all mysterious emails that promote investment deals
  • Thoroughly research any company or person who is offering you something

Keeping up with the latest schemes and remaining cautious will protect you from investment fraud schemes. Also, remember to always report suspected fraud to government bodies.

5 Types of Investment Fraud and How to Avoid Them


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