Brokerage firms like E*Trade
So how can you tell if an investment pitch is a scam? Here are six telltale signs:
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 -- the higher the potential return, the higher the risk that you may never see it.
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 just 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? This isn't just 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 must be registered with the NASD. If you'd like to check up on the background of your broker or his brokerage firm, use the NASD's information request page. Additionally, don't get hooked by suspicious emails that purportedly come from upstanding institutions. Everyone from eBay
5. No prospectus or financial statements. If you seek to invest in a new company that's just going public (an initial public offering, or IPO), you must be given a prospectus. If the company has been around a while, ask to see the financial statements for the past two years. If you need help understanding them, check out our online How-To Guides on reading financial statements.
6. A "hot inside tip." This is especially important to watch -- 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. Now that you're well-versed in spotting a scam, read more about how to safeguard your financial life. And if you're looking for real investment information (we promise it's not a scam), consider one of our Motley Fool newsletters. Take any of them for a free test-drive for 30 days.
Foolish research associate Katrina Chan updated this article, which was originally published on March 10, 2006 by Dayana Yochim. Katrina owns no shares in any of the companies mentioned. eBay is a Motley Fool Stock Advisor pick. The Motley Fool's disclosure policy is no scam.