How to recognize fraud

By: Sarah Carlye

As badly as an investor wants to make money, there are fraudulent investment firms that want to take investor’s money just a badly. Recognizing fraud will help keep an investor from being a victim of fraud. Here are some signs of fraud:

* Sounds too good to be true. Not only in investments, but in any business dealings, if the offer sounds too good to be true, it probably is. Investing is risky, if anyone tells you different, be on your guard and hang on tight to your money. Once money is lost fraudulently, even when fraud is proven, you probably won’t see those funds again.
* Predictions or guarantees of large profits. Research and always get as much information as you can about a firm or individual’s track record and verify that information. If profits are guaranteed, get it in writing and read all the fine print and disclaimers. This advice needs to be followed even if you know the people involved or friends or relatives recommend them. Hang on to your money until you can check out the investment with someone whose financial advice you can trust and who is impartial.
* Promises of little or no financial risk. Be suspicious if the firm or individual says there is little risk. Be suspicious if someone tells you that a written risk disclosure statement is only a routine formality. Written risk disclosure statements are important to read thoroughly. Understanding the risks will be needed to manage the risk. All investments have risks, so you should only invest what you can afford to loose.
* “Interbank Market” trading. If an investment firm claims that they will trade foreign currency for you in the interbank market, or that you should trade in the interbank market, be cautious. The term “interbank market” refers to a loose network of currency transactions negotiated between financial institutions. Banks, investment banks, and other large companies usually do this. Do your research before handing over your money.
* Unsolicited telephone calls about investing. Be skeptical if someone you don’t know calls you about investment opportunities. They may quickly refer to a familiar bank or investment company giving the impression they are representing a business that you know. When in doubt, ask for a name and call the number you usually use to contact your bank or investment company to verify their affiliation.
* Request to send cash immediately. Investments should not be rushed into, so if someone tries to convince you to send cash or transfer money to them immediately by overnight express, the Internet, mail, or any other method, it is a red flag.
* Advertisements in local newspapers, radio promotions, or on Internet sites. There are legitimate investment offers, but the ones that claim they can offer high return, low-risk investment opportunities in foreign currency trading, or even highly-paid currency-trading employment opportunities should be researched. Precious metals scams often work the same way.
* Fast employment income. The scams and fraud doesn’t end with investments but also include offers of employment.
* Commodity pool operators. They often solicit investments from friends, neighbors, co-workers, and fellow religious or social group members by using their reputations in the community or their personal relationships. They may or may not be aware the investment schemes are fraudulent. Some don’t find out until the people they know loose all their money.
* “Ponzi” schemes. This is when individuals and firms that fraudulently solicit funds from investors for commodity futures and options trading. They are usually not registered with the CFTC. Little or none of the money is ever invested as promised in the commodity markets. What happens instead is that the operator of the scam steals the funds, and creates the illusion of a successful business by using some of the money put in by later investors to pay phony “profits” to earlier investors. This tactic makes it appear to investors that the investment is actually making money, which in turn attracts additional investors and referrals. Know exactly where the payouts’ source is and understand exactly how the profit was made.
* Introducing brokers. They often use advertisements and infomercials on radio and television to promote commodity futures and options. They promise quick riches, like turning $5,000 into $20,000 in just a few months, with little risk. Money can be made with commodity futures and options, but it is by researching and working to earn it.
* Discourages research. Any firm that wants you to rely on only the information that they give you is probably going to take advantage of an uneducated investor. Another red flag is if the information that is gathered independently is always discounted.

The people who are making money with their investments are doing it because they take their time and are educated about what they read in a risk disclosure and are careful whom they hand over their investment funds to.

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