Lesson 39: Dangerous Stock Market Scams & Rip-Offs (And How to Avoid Them)

When it comes to stock market investing, it’s not hard to stay safe.

As long as you trade stocks through a respected brokerage based on your own solid research, you should be able to steer clear of dangerous scams and rip-offs.

In fact, we find that most scams can be avoided by following these three rules:

  • If it seems too good to be true, be skeptical
  • Do your investing through a reputable brokerage
  • Be cautious with the latest red hot investment craze (e.g., Bitcoin, marijuana, etc.)

Below we cover some common scams and how to avoid them. If you want to learn more or feel you may have been the victim of a scam, contact your local securities authorities.

Investing Scams to Avoid

Pump and Dump

This is an illegal practice where crooks buy up shares in a little-known stock and then promote false information to drive up the price, at which point they sell before anyone figures it out.

This often happens with small, over-the-counter (OTC, or pink sheet) stocks that have little news coverage and some kind of promising future technology.

A scammer might post fake articles or press releases on internet forums, social media, and other places claiming the company has had a huge technology breakthrough.

Be wary of stocks that are spiking huge amounts based on incredible news from questionable sources.

Guaranteed Returns

There’s no such thing as a guaranteed return. Even a treasury bill from the U.S. government (which is considered to be the lowest risk investment possible) comes with some risks.

When it comes to stock market investing, there are always risks.

Now, there are certainty strategies to reduce risk, and we’d encourage you consider them.

But anyone claiming no-risk investments or guaranteed returns is not credible.

Halo Effect

Sometimes persuasive “con men” will try to convince you to trust them with your money.

They rely on flashy pitches, big promises, and boatloads of confidence to try and get your guard down.

Beware of any pitch that has lots of big promises but very few details.

Jump on the Bandwagon

Deceptive pitches often involve making you feel like you’re the last person to get in on this investment opportunity.

These scams play on your “FOMO” (fear of missing out) and make it seem like many credible people have already vetted the opportunity, jumped in, and collected handsome profits.

Phantom Riches

“Phantom riches” are claims of huge upside returns in stocks with no risk of downside.

While there are certainly investors who can earn strong returns in the market, every investment comes with risk. In general, higher returns come with higher risk.

So, if you’re going to pursue high-return strategies (which is fine), just be prepared the investments will likely have greater volatility and greater downside.

Pressure to Hurry Up

Scammers often use high-pressure tactics to try and get you to open your wallet right away.

They claim that the opportunity is urgent, or the window is closing, or other such promises.

While there are plenty of credible marketing offers that are “limited time only” (for example, a sale that lasts through midnight tonight), anyone that asks you to make a large financial commitment, right now, with little information, is not to be trusted.

How to Avoid Scams

When it comes to avoiding scams, a little common sense goes a long way.

Be cautious and take your time. Don’t move forward until you’re comfortable this is a safe investment opportunity.

If It Seems Too Good… 

If it seems too good to be true, be skeptical.

There are certainly investment strategies and opportunities that offer large upside returns. And it’s fine to pursue those if you understand the risks and they’re a good fit for your financial goals.

But when you encounter any promise of outsize returns with little or no risk, you should look much more closely at the opportunity.

Invest Through Your Brokerage

When investing in stocks, it’s best to buy and sell through a reputable brokerage.

You shouldn’t need to send or receive money from third parties or inform others of how you’re investing.

Be Careful with the Latest Red Hot Investment

There always seems to be some red hot investment trend that keeps going up and up as investors pile in.

Recent examples include marijuana stocks and cryptocurrencies (such as Bitcoin).

There are usually investors who do make quite a lot of money on these types of investments. But they’re often very early to the game and somewhat lucky.

By the time most investors hear about the incredible profits in the latest hot investment, it’s usually become a bubble, which tends to end poorly.

Ask Questions

If you’re skeptical of an investment opportunity, ask questions.

If you get back thoughtful answers backed up by data, testimonials, research, or other solid information, that’s a good sign.

If you get back hot air and big promises, be very skeptical.

Research Online

If you’re skeptical of an investment opportunity, do some Googling online. There are often many other investors who are willing to share their good or bad experiences with others.

Scammers and fraudsters tend to get found out and the internet helps spread the word quickly.

Protect Your Private Information

Anyone asking for private information, such as how much you’re investing, where you invest, what you own, how much money you have, etc. needs to be properly licensed.

These are fine questions for a registered investment advisor who you’re paying for financial and investment advice.

But other parties shouldn’t be asking these kinds of highly-personal questions.

Lesson Summary: Dangerous Stock Market Scams (And How to Avoid Them)

When it comes to stock market investing, it’s not too hard to stay safe.

Work with a reputable broker, don’t look for “get rich quick schemes”, and make your own investment decisions.

If you’re unsure if an investment opportunity might be a scam, the Ontario Securities Commission has a free Scam Spotter tool which helps anyone (in Canada or elsewhere) determine if they may have encountered a scam. 

Author

Todd Lincoln

Author

Passionate stock market investor with deep experience trading small cap, dividend, and growth stocks.

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