It’s easier to access the investment world than ever before. The internet, discount brokers, and the financial media have made it as easy to buy stock as it is to open a savings account at a local bank. That’s great news for people who want to put their money to work but the more open something is, the easier it is to get conned.
Retail investors have the problem of not knowing what they don’t know. Simply put, it’s easy to think that we are sophisticated when it comes to managing our money but studies routinely find that most individuals don’t know nearly as much as they think and that opens them up to well educated thieves who know how to pray on ego in order to get their hands on your money.
There are now an unprecedented amount of “alternative” investments on the market. These are investments that aren’t purchased in the traditional stock or bond market and are usually marketed as open only to certain people. Some are legit but others are cons. Here are some ways to tell the difference.
Investment advisers are not allowed to guarantee returns. If you read a prospectus of a mutual fund in your 401(k) account, you’ll notice that nowhere does it say what you will earn in the futuere. It will provide historical data but it won’t guarantee future results. In fact, if you read far enough, you’ll find a disclaimer saying that they can’t guarantee anything.
If somebody tells you a great story about an exclusive investment that guarantees a certain return, it’s not worth your time. Run away!
“Game Changing Technology”
A certain startup company has just invented a technology or miracle drug that is going to be a game changer and that’s why you should get in on this stock (normally a penny stock) before everybody else finds out. If that’s the case, why did they single you out and why is the stock still priced at 10 cents? Most “game changers” happen in larger companies who have the R&D capital to fund the research. This is likely a penny stock pump and dump scheme.
Hard to Find Figures
Small companies listed on alternate exchanges like the Pink Sheets don’t file reports as often as larger companies listed on the NASDAQ or other major exchange. If you can’t find the information you need to adequately research the company, why should you invest? There are plenty of companies with easy to find information that are more worth your money.
It’s Too Easy
Making money in the markets is exceedingly difficult and beating the market is almost impossible over the longer term. If the methodology doesn’t make sense to you or the gains seem way too large (Bernie Madoff) it’s most likely not something that deserves your time or money.
The best way to avoid a scam is to keep your ego in check. Many of the best investors have fallen victim to their own ego thinking they could make money in places where other people don’t notice. In the modern age of easy to find information there are no secret hiding places and if there are, they are illegal. If you’re a retail investor, stick with the big stock and bond markets and buy large companies that have a track record of success