“You can fool all the people part of the time and part of the people all the time, but you cannot fool all the people all the time.” – Abraham Lincoln
Opportunities come and go. Those who move fast arrive first and reap the best reward. The risk of fast decisions, of course, is overlooking facts and not thinking clearly.
Investors who don’t think independently become money chasers and the scammer’s favorite target. The difference in dealing with securities fraud is:
- The money you make (or lose) is your responsibility.
- You can rarely undo your mistakes.
- It’s too easy to play with ambiguity to make illegal schemes look legal.
Is the stock market a scam? In general that is of course not the case. However there are many variables that can nudge this to the dark side.
- Trading a real asset value? Not a scam.
- Speculating with perceived value? Yes, most likely.
The moment value disappears, you get into a complex game of mass psychology, confidence tricks, and delusion. Hence the saying “only invest in what you know.”
But what about the rising stars? Agents phone you all the time about the one company that will change the world but has no history. It’s easier to pump a penny stock…just as easy as it is to dump it.
Remember? It’s possible to fool everybody and make it look real for a limited period of time. That’s how scammers get in, profit, and walk away.
- Securities Fraud: Miracle Stock Or Money Pit?
- 4 Tools To Promote Fraudulent Investments
- Types Of Investment Scams
- Red Flags To Avoid Stock Scams
- Preventing Securities Fraud
- The Bottom Line
Securities Fraud: Miracle Stock Or Money Pit?
Who would have thought that “securities” may not be so secure? If you mix real with perceived value, you get some fundamentals of truth to make the scam believable.
Also known as stock fraud, security scammers mislead investors with promises to make them money, often losing all.
Good investment decisions require accurate data. Otherwise, you might be betting on an advance fee scam with low chances of return.
But securities are hard to fake. Anybody can check whether a real asset shows what the agent claims. That’s why most sell innovative, micro-cap stocks nobody knows about.
Hypothetically, we could have made money if you bought the penny stock before the rise. But insiders only share this “secret info” with you once it’s too late. What they sold you as the market floor is the actual ceiling.
Stock Scams: Why Do We Keep Falling For It?
- Getting-rich-slow isn’t as attractive as getting-rich-quick.
- Doubling a penny stock looks much easier than profiting from a large-cap stock.
- If the reward is big enough, confident people will ignore the downside, putting the money they can’t afford to lose.
- There’s little information, so we trust the only (fraudulent) agent that has it.
Long-term investors hold their assets for years despite the daily fluctuations. They don’t try to beat the market or play with uncertainty: they decide based on logic and still know they could lose.
But reckless investors want to time the market even if they risk all their capital. Because market timing is so complex, it’s very attractive to trust a stranger who promises you a can’t-lose opportunity.
All a scammer needs today is a sleek website, advertising, and an offer you can’t refuse. They appear on social media and ranked websites promoting their time-limited offer. How long does it last? As long as the fraudster wants, once they have gathered enough victims on their list.
4 Tools To Promote Fraudulent Investments
How easy it is to hide an advance payment scam with the word Investment. It only takes some research to find out the inconvenient truths. However, these agents have tricks to dissuade you from thinking independently.
#1 Well-Thought Scripts
Content is king! A fake financial advisor will show only the superficial parts of a company: the website, press releases, and social media.
As you read, you may find truthful information mixed with non-sense jargon to create their own version of the events. If they need to mention a negative fact, they can use another word with the most positive connotation.
Better than press releases, phone scripts. Here’s a prepared agent calling an unprepared prospect who won’t have time to think about it. Think ahead of them, and the victim will believe it.
#2 Affinity Groups
Same goals, same background, same age, or interests. No matter what they share with you, affinity groups mean: “We have the same objective. If we work together, I’ll have your best interests at heart.”
You know the saying: “You can’t trust anyone more than yourself.” Affinity groups play with that logic to give a false sense of trust which has nothing to do with smart investing.
Affinity groups use the expressions:
“We’ve all been there before.”
“My other clients who were just like you already got the results you want.”
Creating an affinity group instantly involves discriminating against the contrary. Shouldn’t they have the same rights as you? Investing is about what you know, not your background.
#3 Social Media Influencers
Similar to affinity groups. The agent mentions some big names who happen to be their best investors. Guess who comes next: the millions of followers who blindly follow advice.
Too absurd? You maybe haven’t heard of how the rapper 50 Cents soared the HNHI stock by 270% with one viral Tweet.
No, those millions who followed didn’t get rich. Although what’s popular is seldom what’s best, it’s uncomfortable not to follow the trend. If the top ten Forbes CEOs have invested in this stock and others have followed, how will you be the lonely soul who doesn’t?
#4 Accidental Insider Leak
Many will relate this one to the lottery scam. The scammer poses as a company insider who sends an informative email to his partner. He deliberately sends it to a random person to make it look like an accidental leak.
Millions of investors will receive it, thinking they’re the only lucky person who got privileged information. The message includes what the company will do, how, and when events happen.
It could be data about a stock, a new financial tactic, new technology, or a pyramid-like opportunity.
Types Of Investment Scams
If an advisor helps you make money, you succeed. But if you hire a fraudulent one who loses all of it, you could blame the market, the timing, or the strategy.
Securities fraud is the only scam victims won’t notice even after losing. You see yourself as the one who controls the investment, and the advisor mentors you through the decisions.
When we look at the past, however, financial advisors have a long history of failures. Any crisis we’ve gone through was the result of misinterpreting supply and demand.
Not all these agents are scammers, but most of them work for their interests.
#1 Bogus Offerings
Energy, mining technology, communications. The group tries to bring to the market a product that hasn’t existed yet, meaning you can’t find any information about it. And innovation is the best way to justify “this time it’s different!” which is a dangerous mindset.
You find yourself investing in a foreign company that may never make profits. Scammers will tell you the stock has already been doing well for some weeks, and others have made money already. Would you believe it if they were the only source of information?
#2 Accounting Fraud
Any startup can promote innovative products. But accounting fraud can happen in any business regardless of size and authority. In fact, the bigger is the brand, the more incentives you find to misstate numbers.
We’ve heard horror stories from Lehman Brothers, Enron, and Worldcom. You inflate the recorded revenue and unrecord the expenses. If you do well, you can use the money lost to make more and fill that gap. Otherwise, you’ll need more financing, entering a vicious cycle.
As a result, people were giving money to these brands (so they can lose it). The fact the company grows when others are falling during hard times makes it more suspicious.
#3 Pump & Dump
The investment group promotes fake positive news about penny stocks to convince others to buy. These illiquid, micro-cap stocks have high price changes after every transaction.
The group buys slowly to fake a chart of consistent growth to sell the victims. Once all the buyers coordinate, fraudsters sell at the highest price and exit. That leaves the others with over 50% price decreases.
Victims often see these groups as the only source of information. But right after they dump the stock, they stop promoting it, exposing the truth.
Since the scammers get in until they get out, that stock raises its value despite the crash, perhaps by 70%. But most investors had joined once it was way higher, thinking it was the market floor.
#4 Reversed Pump & Dump
People no longer believe in get-rich-quick schemes these days like they used to. If you hear of a company with no history, you’d rather lose the opportunity than risking your money.
Well, the reversed pump-and-dump (or short and distort as it is called by the other name) exploits that fear of losing your fortune. A group will share fake information to talk negatively about the stock. They keep marketing to cause an artificial demand decrease in micro-cap stocks.
Same strategy: buy when it’s low, sell when it’s high. Once others find out the truth, prices go back up. Victims made no money for being out of the game, and the scammer has got the best deal.
#5 Pyramid Schemes
The results resemble the pump-and-dump scheme. Everybody makes money at first, but the structure collapses after too many members have joined the trend.
Imagine promoting a financial product and get paid whenever someone buys it. The catch is:
- There’s often no real product
- You need to pay to join the club
- New members finance early investors (aka Ponzi Scheme)
Those who are on top of the pyramid exponentially make more money than newcomers.
#6 Financial Advisors
You can’t just keep your money in the bank; it devalues if you don’t use (invest) it. But how do you make the most of your money? Advisors claim to help you with a strategy that creates lasting wealth.
However, over 99% of advisors are just “brokers.” They work for an investment company and have incentives to sell you their products. Although it’s not illegal, these advisors you’re hiring don’t need to help you! If they work on their interests, you’d be paying them to make them money from you.
A broker may still disguise as a fiduciary, including hidden fees, and sell you regardless of what you need. A real advisor gets paid with transparent fees based on his consulting service, not sales. They stick to the so-called Fiduciary Standards.
#7 Prime Bank Memberships
A scammer invites a victim to join an exclusive investing group. Only top financiers can access prime banks, but the agent makes an exception for the client.
This group promises fast returns of even 100% because of their privileged tools. Of course, you must keep the secret to keep the group exclusive, meaning you can’t consult with an expert.
Despite all the forged documents, prime banks are simple: an agent poses as a bank with the promise of big returns. Confidence trick.
Keeping with the occultism, bogus prime banks use complex jargon to make the message hard to understand (and reveal).
Red Flags To Avoid Stock Scams
No investor gets into the market expecting to lose money. We assume things will go well in the long-term, especially when some advisor “guarantees” results.
The more they tell you not to worry, the more concerning the problem must be. Here are seven scenarios to always avoid:
#1 Risk-Free Guarantee
You can notice a trend among world-class investors. Experience shows you can never be sure of anything even if your odds of losing are tiny. To put it in other words: “The more I learn, the more I realize how much I don’t know.”
An advisor that promises consistent returns is likely lying to you. Even return-guaranteed investments involve some sort of risk.
The only guaranteed method to never lose money in the market is to never get into it, which is a huge opportunity cost. You can find zero-risk investments, but they only work for so long.
#2 Unknown Investments
You can only control as much as you can understand. If you invest in an unknown market only because of money, you will fail to make decisions and lose money.
Inventions are risky. You may have heard: “Geniuses are called crazy until they succeed.” However, you never want to be the pioneer on a market you don’t know. There’s nothing worse than getting it wrong for listening to a stranger.
But most innovations aren’t outlandish. They relate to things we know: online commerce, mining, lithium, AI, oil, or transportation. If people can relate to past trends, they’ll assume this stock will evolve the same way although there’s no evidence.
#3 One-Source Information
Often when bringing new ideas to light, the media hasn’t had enough time to promote it. When so few websites share information about the stock, it’s too easy to manipulate what investors see.
A newbie with no knowledge about the market patterns will trust the only source they can find: the scammer. Now, is the data real or designed to make you believe something different?
That’s why “insider information” creates confusion. It’s safer to assume than any rumors are wrong unless proven right. That opportunity you fear so much to miss out may not even exist.
#4 Pressured To Buy
Are they selling you an offer you can’t refuse? Do you fear missing out on a “once-a-lifetime” opportunity? What would have happened if you said Yes to that stock before it skyrocketed?
Calm down. If you’re pressured to buy, you’re thinking with emotions, which is never good for investing. Besides, do you believe that the agent cares about you so much that they don’t want you to miss out?
Again, the incentives. Bogus advisers sell products whether you need them or not. Don’t let them fool you and stick to what’s essential: if you don’t want to be 100% in, then you must be 100% out.
One rule of thumb is the truncated downside: invest as much as you can afford… to lose. So if the worst case happens, it won’t be as bad as you thought.
#5 Suspicious Consistency
It goes hand in hand with zero-risk promises. How could a company stock not go down even once in months? A never falling stock is just as unrealistic as expecting a worthless stock to rise.
One may put his whole fortune on a stock because it’s been doing great recently. What we may not know is whether the results are artificial or manipulated (see accounting fraud).
Especially with innovation, you can’t expect predictable results with a product the market has never seen.
Preventing Securities Fraud
Good investments come from independent analysis. You can always get it wrong, but that’s better than losing for having listened to another person. At least you did your own research.
You don’t want to find out the mistake once it’s too late to back off. Your rewards depend on the amount of risk you’re willing to take just as your preparation determines how much you will keep.
#1 Who Is Giving The Advice?
Let’s imagine you get an insider’s message “accidentally” that leaks the secrets of a stock. Since it’s insider data, you’d assume it has the authority to consider it legit.
Regardless of the information you find, check first the organization. Do the numbers make sense? What is the company about? How do they create their wealth? What makes them so undervalued these days?
There’s a reason penny stocks are worth that little. Now, you could miss your chance to invest in the next Netflix, but the missing credibility is never worth the risks.
#2 Think Independently
The only person you can trust is yourself. Although official news may look real, you never know how that will affect the stock, or whether that’s a scammer impersonating the firm.
Nobody will care about your interests more than you. Understand the company, their incentives, and pay attention to what they don’t say.
Although personal research is common sense, it’s not common practice. Official reports are comfortable to accept and hard to refute, especially for busy investors.
#3 Fiduciary Financial Advisor
Some investors are afraid of financial uncertainty. After all, 99% of advisors are brokers trying to pitch them services, so they rarely find someone they can trust.
When having large sums of money, managing it alone is neither the best option. But you can always look up for fiduciary advisors on the SEC’s search tool.
The truth is, a fiduciary advisor can still be a broker despite the certificates. Because of it, you should ask questions whenever you interview an advisor:
Are you a registered adviser? What’s your philosophy about investing? Where will my money be held?
#4 Time In The Market, Not Timing The Market
People have wrong expectations about what a stock should be worth. That leads to psychological games where investors compete among themselves, not the company.
Smart investors know you have to stay in the market to capture all the opportunities. If you are always buying and selling, you lose those chances.
Although it can make you rich quick, timing can lose all your fortune on unpredictable events. But scammers can’t influence patient investors who hold their stocks for years.
#5 Expect The Best, Prepare For The Worst
The next time an agent reaches out, double-check the firm on the SEC page. You can always claim using FSCS to compensate for financial losses.
Mistakes happen all the time although we rarely expect them. Having an emergency plan will reduce your risk if anything goes wrong.
The Bottom Line
In investments, you should pay more attention to who’s giving the advice than the message itself. If you can’t verify yourself, assume everything is wrong unless proven otherwise.
Taking not-calculated risks isn’t worth the gains. If you lose, say, 50% of your money, you need to grow by 200% just to get back to the initial point. The secret to never lose is to stay in the market for the long run.