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Common Investment Scams

Aug 26, 2007
In recent years, there has been a massive proliferation of investment scams circulating the internet. I receive up to 5 emails every day containing these scams. The internet is a fantastic resource for investors, providing real-time stock quotes and access to current research and analysis. However, the lack of regulation in cyberspace enables financial gurus and hucksters to perpetrate their money-making flimflam on a daily basis.

Pyramid schemes are one of the most common forms of investment fraud pervading the net. With these, you are asked to contribute a certain amount of money, and then you are promised a return when new investors make their contribution. Eventually, the pyramid collapses when money owed to the previous investors is more than what can be raised.

Next on the list is an outright illegal practice called the pump and dump. This is when a small group of investors who hold a large number of shares in a company go around hyping the stock to the uninformed public. The resulting frenzy drives up the price of the stock, at which point the aforementioned small group of shareholders dump their shares at a high price before the general public knows that the stock is worthless. Sometimes, pump and dumpers will engage in short selling (short selling is a perfectly legal and legitimate practice, whereby you borrow stock from someone else and immediately sell it, hoping that the price of the stock will go down in the near future so that you can buy it back at a lower price and return it to the person who loaned it to you at a profit). With pump and dump short selling, the borrower sells the stock that was loaned to him and then goes around spreading bad rumors about the company to drive the stock price down so he or she can buy it back at a low price before returning the shares to the original owner.

You should also steer clear of any emails you receive about offshore investing or prime banks. Offshore companies, thanks to the internet, are no longer faced with obstacles such as direct mail or long distance telemarketing. Promises of huge returns from offshore investments are usually totally bogus. Another scam you need to be wary of involves prime banks. Prime banks are the top 50 banks in the world. Internet hucksters will ask for your money so that they can invest it in risk-free, high yield prime bank financial instruments. However, they will likely invest your money in high risk, speculative investment vehicles that have absolutely nothing to do with prime banks. Avoid prime bank solicitations like the plague.

I hope this information will help you avoid falling prey to investment scams. However, do not be afraid to invest in companies just because there is some pumping and dumping. Just because a few shareholders decide to pump up a stock for their own selfish gain, does not mean that the company is not a good investment. People have made fortunes on the stock market by investing in relatively new companies before anyone else knew about them. Those who did not invest in these companies because they thought they were pure hype lost out on a chance to make millions. Use your common sense when deciding whether or not you want to invest in a relatively unknown company. Do some research before you invest in and you should do fine.
About the Author
Jim Pretin is the owner of http://www.forms4free.com, a service that helps programmers make email forms.
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