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Protect Yourself From the Next Investment Scam

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There are a lot of shady people hoping that you're after instant riches -- or at least a boost toward making up for your recent stock market losses. Boy, do they have the sales pitch down pat. There are tax scams, penny-stock huckster scams, instant-messaging scams, Nigerian confidence scams, mortgage-servicing scams, wrong-number pump-and-dump scams, bad-roommate-from-Craigslist scams. I could go on, but my keyboard is out of breath.

How can you tell if an investment pitch is a scam? Unfortunately, there is no foolproof system. So occasionally we get a Bernie Madoff in the mix. However, there are telltale signs that something's not right. Here are the top six:

1. The promise of "low risk and high gain." Click your heels three times and repeat to yourself: "There is no such thing as a free lunch." It's a fundamental fact of investing that the higher the potential return, the higher the risk that you may never see that return.

2. Warnings that it will be "too late" if you don't act now. Why will it be too late? Any legitimate investment will be there tomorrow and next week and next year. Never get pressured into investing in something because tomorrow may be too late.

3. Predictions of the future. "It will double in three months." Oh, yeah? Since when did they start marketing crystal balls? Not only is this a ridiculous promise for a broker to make, it's illegal. Also, any broker who guarantees a rate of performance will get tossed out of the industry. Don't throw your money after him.

4. Failing the background check. Any individual -- as well as his or her employer -- selling securities to the public must pass a background check and a series of examinations, and be registered with FINRA. If you would like to check up on the background of your broker or his brokerage firm, use FINRA's BrokerCheck tool. Additionally, don't get hooked by suspicious emails that purportedly come from upstanding institutions. Everyone from online auctioneers to mutual fund companies have gotten spoofed. Don't fall for phishy emails without first checking out the sender.

5. No prospectus or financial statements. If you seek to invest in a new company that is just going public (an initial public offering, or IPO), you must be given a prospectus. If the company has been around awhile, ask to see the financial statements for the past two years. If you need help understanding them, check out our online series on how to value stocks and read financial statements.

6. A "hot inside tip." This is especially important to pay attention to -- not because it could make you rich, but because it could land you in jail. It is illegal to pass on or act on material that is inside information. Anyone telling you otherwise is a liar.

Don't let the thought of predators deter your resolve to invest. Check out the Financial Industry Regulatory Authority's running list of investor alerts on its website and tally of alerts from other organizations.

For more Foolishness:

Dayana Yochim uses Google and gut instincts to fight crime and find funny videos of kittens in hilarious situations. The Fool has a disclosure policy.


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