How to Spot A Fraudulent Investment

Rate: (0 Ratings)

Your investment advisor has just called you up and told you excitedly about some new whiz-bang investment that has just been issued. It will pay 20 percent per year guaranteed, double your upper body strength, increase your sex appeal and make you 10 years younger. But is this investment really the greatest thing since sliced bread, or are you being taken for a ride? Here are a few things to look for.

Flag Article

Instructions

Difficulty: Moderate

Things You’ll Need:

Common sense
A willingness to ask probing questions

Step1

One of the first warning signs that an investment is not for real is if it boasts an endorsement from the SEC. Neither the SEC nor any other regulatory agency EVER endorses or recommends specific securities or investments to anyone. The SEC merely clears securities for issuance after they have satisfied all due diligence and procedural requirements.

Step2

Another suspicious indicator is the requirement that you invest immediately, without taking the time to properly analyze the investment and evaluate its risks. Although some types of investments will only be available for a certain length of time or at certain intervals, beware of "once in a lifetime" opportunities.

Step3

The rate of return being advertised will also clue you in to the validity of an investment. If prevailing interest rates are around 5 percent and an investment guarantees a 20 percent return, then there is either a high level of risk involved or the return will probably never materialize.

Step4

Finally, if an investment is advertised as being all things to all people, then it's either inherently bogus or else misrepresented. No one type of investment is appropriate for everyone, although there will virtually always be some type of investment that is appropriate for anyone in a given situation.

Tips & Warnings

The ideas presented in this article are intended as generalizations. Be sure you understand you're getting into before you invest. Always ask questions and get a prospectus or other written information whenever possible.