Warning Signs: How to Spot an Investment Scam

Read the warning signs and know how to spot scams. It could be the best thing you ever do

Sara Silano 2 November, 2021 | 10:51AM
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Investment scams can ruin your life

Thousands of people lose millions to investment scams each year. The Internet has become one of the most popular tools used to commit fraud and criminals are becoming more and more sophisticated with their hacking techniques. Thankfully, there are some warning signs, which you can use to avoid falling victim to scammers.

What is an Investment Scam?

Investment scams aim to get unsuspecting people to hand over money. They can seem perfectly legitimate, appearing knowledgeable with websites, testimonials and marketing material. The most famous kind of investment scam is the Ponzi Scheme, where money is collected from new investors to pay previous investors.

Eventually, the money owed is more than the money being collected and the scheme collapses, leaving all the investors out of pocket. Today, due to the internet and digital communications, investment scams can be much more complex. 

Warning Signs

To check if an investment opportunity is a scam, look at the following warning signs:

  1. You get unsolicited approaches or offers by phone call, text message, email, or a person physically knocking on your door;
  2. The person who contacted you did not provide clear answers to your questions;
  3. You get persistent phone calls from the operator to induce you to invest (so-called Cold Calling);
  4. You are forced to make a quick decision;
  5. The firm or operator doesn’t allow you to call them back, or you are given with only a mobile phone number for contacting them;
  6. The information provided is not confirmed on the firm’s website;
  7. You’re being offered a high return on your investment, but you are told it’s low risk;
  8. You’re promised easily achievable returns and incentives to entice you to invest;
  9. They may share fake reviews and claim other clients have invested or want in on the deal;
  10. They can build friendship with you to lull you into a false sense of security;
  11. The company’s domain is based in offshore countries/tax havens.

Regarding point four, remember that in the UK making unsolicited calls to someone about their pension is now illegal. Companies that do so can be fined up to £500,000.

What to Do Before Investing

Before investing, you should ask the person who contacted you for more information. For example, you can ask more details on the company, if it is authorized or regulated, and who the authority or regulator is, what is the firm reference number and where it is based.

You can also do some basic checks yourself.

First, check the website of the local financial supervisory authority that is supposed to have authorised the company. In the UK, you can search the Financial Conduct Authority's "register" to find out whether the person or company calling you is legitimate.

Second, verify the firm’s website/domain under the name with which they operate, in order to avoid so called “clone sites” (illegal companies which use website/domain whose name is similar to that of an authorised firm).

Third, check the financial service register of the country where the company declares to have its legal headquarters and the related information (name, headquarters, etc.). If not possible, enter the firm name into Google and check the main results published in forums, blogs and other, on the web. 

Fourth, check the local financial supervisory authority’s Warning archive, that contains reports on financial activities carried out fraudulent initiatives.

If you don’t receive clear and complete information, do not rush to invest at any price, because the proposal might be a scam. Remember that the abusive practice of investment services is a crime. If you are suspicious, report the firm or scam to the local supervisory authority. If you’ve given your bank account details to a firm you think may be operating a scam, tell your bank immediately. Be wary of people who promise you to get back your money.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Sara Silano

Sara Silano  is Editorial Manager for Morningstar Italy