If you are just starting to invest and you want to be completely protected from any scam or “amazing opportunity” out there, you should definitely learn everything you can about how these scams work and what kind of people they attract. The problem with investment scams is not just that they fool the younger, less experienced investors but they can also easily fool even the most mature and experienced ones. For example, a lot of billionaires fell for the Ponzi scheme and others that followed because they all seemed to be pretty legit right until the very end. For example, one of the most famous and elaborate scams in recent history was the Madoff scam. He managed to fool not only investors but also the authorities who were supposed to check for such scams and prevent them. So let’s look at some of the red flags that might point to a scam:
- The person who is telling you about the opportunity is both the manager and the custodian. Firms that don’t have an independent custodian to hold their client’s money might need further investigation if you plan on trusting them with your money.
- Senior investment frauds – these types of frauds are a lot like Ponzi scams. Before putting your money in something like this make sure that you learn as much as you can about the company.
- Cold calls – if somebody is trying to cold call you about some opportunity that you should never miss you should simply ignore it. No reputable company will call out out of the blue to tell you about an investment like that.
- Overly successful managers – Sometimes if a manager tells you how much success they are having, it should raise some questions. Most of the scam artists will try to lure you with their success so make sure that you do a thorough background check on them before investing in anything. Actually one of the reasons why the Madoff scam was so successful was the fact that he was so well known and considered to be extremely successful, so when he boasted about his profit nobody even bothered to check his claims.
High profit – High profit usually means extreme risk, but if you are told that it’s both high profit and safe, it’s probably a scam. There is no such thing as a high profit, low risk opportunity and if it looks too good to be true, it usually is.