How to Protect Yourself From an Investment Scam

There's nothing wrong with putting your money to work for you. Investments can be the difference between making ends meet, and making a mint. But remember your mom's advice: If it sounds too good to be true, it probably is.

Following this warning is one of the best ways to avoid financial scams. Here's a list of some infamous investment frauds, and ways to spot red flags. Pay attention. Make your mom proud — and your wallet happy.

The Classic: Pyramid Scheme

Many pyramid schemes come across as multi-level marketing opportunities. Investors pay fees to join and then make money from direct sales. Backers also get a cut of profits from folks they've recruited to the program. But pyramid organizers need this new money to pay off earlier investors, and often, the scheme collapses under its own weight. There's not enough money to make payoffs. Participants see investments and returns disappear.

Pyramid schemes often spread through social media, websites, online ads, and group pitches. Be alert to these warning signs.

  • You're told you'll make a lot of money quickly, but you won't have to put in much effort.
  • You have to pay a fee to join, and your main role is getting others to sign up.
  • Any product that's sold has little value outside the scheme.
  • You can't find evidence, such as professionally audited financial statements, of sales profits. Money comes from recruitment.
  • Profits come from within the program. Your earnings depend upon other participants, not on outside sales.

Lots of money, little work: this is exactly what your mother was talking about.

Risky Business: Energy Scams

Legitimate investment opportunities in oil and gas development come with no guarantees. They need lots of money and time, and proceeds are uncertain. Developers might drill and drill with little return for their efforts. Investors can lose everything they put in. And that's with authentic energy exploration. If the whole purpose is to separate you from your money, participants don't stand a chance.

So how do you separate real energy investment deals from scams? Be on the lookout for these warning signs.

  • Company offices are in one state, drilling is in another, and investors don't live in either. You can't easily visit the corporation or well site. If fraud is suspected, the geographic range creates a nightmare for law enforcement investigators.
  • You receive a surprise email or phone call. You don't hear a lot of facts, just tremendous pressure to commit. You're warned that if you don't immediately jump in, you'll miss out. Real energy companies don't fish around for investors.
  • Little risk, high returns: Is that what you've been promised? Run away, because that's not how it really works in the energy business.
  • Some get-rich-quick scams use current events as lures. If high gas and oil prices are currently in the news, investors might be convinced the time is right. But remember, well development is a long process.
  • If the company is secretive and doesn't want you to talk to anyone about your investment opportunity, there's a good reason for that. It's a shady proposition. You should be encouraged to consult others and investigate the deal. And all your questions should get answers — in writing. If you get shut down, close your wallet.

Energy development is a business, not a mystery. All aspects should be open and aboveboard.

I'm Just Like You: Affinity Sham

Affinity fraud targets participants based on a specific characteristic, such as age, religious affiliation, or ethnicity. Schemers present themselves as members of the same group in order to create an immediate relationship. Some hustlers are so good they enlist recognized leaders of the community. Unfortunately, these respected notables wind up falling prey to the scam — and unintentionally drawing others in.

You might feel a connection to the individual trying to get you to invest, but that's what these con artists count on. Be wary.

  • Don't invest just because you have an association with the promoter — even if it's someone you trust. That person may have been duped. Do outside research. If that's discouraged, say no. Real investments hold up against scrutiny.
  • Avoid online opportunities that show up in chat groups, bulletin boards, or websites exclusive to your group. The Internet is a quick and easy way to target a specific audience.
  • Steer clear of any investment that guarantees low risk and high returns. The two just don't go together. Valid deals don't promise them.

The bottom line here — listen to your mother. When it comes to changing your socks, eating your vegetables, and avoiding fraud, she knows best.

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