Investing is an important part of growing your future and creating a strong financial future for you and your family. Unfortunately, not all investment opportunities are legitimate. It is important to be aware of how to prevent investment loss and the difference between investment fraud and investment loss.
In this article, we will take a peek under the investment and securities hood to see just how this engine runs.
What is Investment Fraud?
When you think of the words investment and fraud together it can sometimes be a scary thought. It is important to understand that not all brokers and financial advisors are trying to scam people out of their money, but it is also equally as important to know what types of behavior would classify as investment fraud.
Investment scams take many forms, but they all have one thing in common: They lie about how much your investments will actually make (over time) or create misleading information that could lead you to make a bad decision. If your broker makes claims such as “You’ll get rich quick with this deal!” then there’s almost no chance that it’s legitimate, unless you’re really lucky maybe? See if any of these red-flag actions sound familiar to you.
- Your broker claims that you have a guaranteed return on your investment.
- Your broker tells you that your financial future will be irrevocably changed if you don’t act now.
- You are told that there are no risks involved because it’s a sure thing.
If these red flags make the hair on the back of your neck stand up, do yourself a favor and look for another investment opportunity. That’s not to say all investments should be avoided, but it’s important to protect yourself from fraudsters who prey on ordinary people looking to better their lives through investing. A word to the wise, if you lost money due to investment fraud, you should consider talking with an investment fraud lawyer.
The Most Common Forms of Investment Fraud
Investment fraud comes in all shapes and sizes. Here are a few common forms of investment fraud:
Ponzi Schemes – A Ponzi scheme is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors. The word “Ponzi” has become a widely recognized term for all scams of this nature. So, if someone tells you they can give you 10% interest every month with absolutely no risk, just walk away and go about your business.
Pyramid Schemes – Pyramid schemes are illegal in most countries or regions including the United States, Canada, European Union member states, Hong Kong, Japan, and Australia. If someone tries to convince you that their way of making money requires very little effort on your part (that’s because there isn’t any) then they’re probably trying to pull a fast one on you.
Affinity Fraud – Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities or the elderly. One example would be someone who is part of your church tells you all about this great new business venture they are investing in with their retirement money, but you are the only person they are telling because it’s “top secret.” That should ring some bells.
Make Sure to Protect Yourself from Investment Fraud
Do not invest with any broker unless you fully understand how much risk is involved and what return you can expect for taking that risk. Be especially wary if the claimed return is substantially higher than average market returns – there is usually a reason why something sounds too good to be true.
Always get a second opinion from another trusted source before making any investment decisions. Also, never make an important financial decision based solely on what someone else tells you about their past successes and/or abilities (even if they do claim to be a professional.)
When in doubt – ask for help! A good broker will know how to provide sound advice for your unique situation without pressuring you to take unnecessary risks with your money.
What is Investment Loss?
Investment Loss refers to any investment that has declined in value or has not provided the returns that were expected. This is usually due to market forces beyond the control of the investor (such as a global recession in which case your loss is pretty much guaranteed.)
If you’ve never lost money on an investment before, consider yourself lucky! I’m sure everyone learns about at least one loss during their lives, but hopefully, it doesn’t come back around to bite them financially. We all need some bad luck every now and again so we can appreciate good luck when it comes our way.
Investment losses are often caused by uneducated investors who invest too quickly without fully researching potential risks involved with their investments – do not let this be you! Make sure you know how much risk you are willing to take on before investing any of your hard-earned money.
How Can You Protect Yourself From Investment Loss?
Investment loss is just that – when the value of an investment has decreased since the purchase date or it is completely worthless. There are many reasons that investments decrease in value, some of which are out of our control as investors. However, there are many things that we can do to minimize investment losses.
1) Have a Plan – Before making any investments have a financial plan in place. Make sure that you know how much risk you can take on and what kind of returns you expect from your investments. This will ensure that your portfolio stays balanced with low-risk/low-return bond funds for the long term, less risky savings goals, and high-risk/high-return equity funds for short-term goals with shorter timeframes until they mature (such as individual stock purchases.)
2) Do Your Homework – Never make an investment before fully researching the company’s business model. Many new investors feel pressured into “playing it safe” by investing in companies they’ve heard positive things about only to lose their entire savings when the company tanks unexpectedly. There are many ways to learn about companies, but at the very least make sure you read their annual reports and 10K filings before making an investment decision.
3) Diversify – Ensure that your portfolio is diversified across a variety of asset classes (stocks, bonds, cash, real estate) and industries to protect yourself from anyone economic or industry downturn. You can never invest without risk, no matter how low-risk/low-return your investments may seem. This will help ensure that your money lasts through both good markets and bad ones.
4) Avoid Leverage – Although leverage does increase potential returns on investments it also increases in down markets. If you are looking to get into more risky investments, you are better off just learning about investing instead of using your home as an ATM machine.
5) Educate Yourself – Do not rely on new investors for financial advice. It is important that you gain a good understanding of how the market works before making any major investments. There are several free online courses available through which you can learn many of the basics in about 30 minutes or less. This will help ensure sound investment decisions so that you may avoid losing money to newbie mistakes.
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