Investors understand how to manage their money and determine which investment opportunities are right for them—and which ones are not.
However, investors also know that each investment comes with a certain level of risk. They do not expect that risk to be in the form of financial fraud, but that is often a dangerous possibility.
Fortunately, there are ways that investors can avoid financial fraud, as long as they are aware of the warning signs.
1. Promises of low risk and high rewards
As mentioned above, investors know that there is no way to avoid risk. Of course, there are methods to reduce the risk, but not ways to eliminate it entirely.
Therefore, any company or sales pitch that promises little or no risk should immediately alert an investor to potential fraud.
Investors should also take note if the sales pitch promises instant high rewards. The market is constantly changing, and there is no way to predict the outcome of an investment.
2. Pressure to purchase the investment
As an investor, it is your choice to make an investment or not. So, you should never feel pressured or obligated to invest your money.
Any investment that proclaims to be a "limited-time offer" or pushes investors to act quickly should lead investors to avoid that opportunity.
3. Information, including yours and the custodian's, is not visible
Honesty and transparency are critical in the investment world. If it is not possible to review your activity and investments in the account, that should be an immediate sign of concern that investors should report.
What investors can do to protect themselves
FINRA provides a helpful guide for investors to protect themselves, but it is also essential to always:
- Be skeptical, and not rush into an investment
- Verify the investment with a securities regulator or the Securities and Exchange Commission
- Confirm the company's licenses and qualifications
The adage of "going with your gut feeling" is actually another helpful piece of advice when making investments. It is critical to use your judgment and take care when approaching an investment.