Millions of people exercise their capitalistic muscles every day by buying and selling stuff in Internet auctions. Only on dedicated auction websites like eBay (NASDAQ:EBAY), and in auction forums provided in places such as Yahoo! (NASDAQ:YHOO) and Amazon (NASDAQ:AMZN), can you shop for baseball cards, fine china, and Elvis memorabilia while still in your pajamas.

Unfortunately, a few bad apples take advantage of the online marketplace by trying to defraud unwitting buyers and sellers. The Internet Crime Complaint Center (run jointly by the Federal Bureau of Investigation and the National White Collar Crime Center) recently reported that Internet auction fraud was, by far, the most reported online fraud offense last year.

Auction fraud made up 45% of all complaints, and the average victim lost $602.50. The potential pitfalls affect both buyers and sellers.

How auction fraud works
The most common problem you'll potentially face with online auctions is someone who doesn't follow through on the deal. It could be a buyer who never pays or a seller who never ships what you bought. If you're the buyer, you might also get something you didn't order, or you may have been misled about the product's condition.

The Federal Trade Commission has also gotten reports of more serious problems. Some sellers lure buyers away from an auction site by promising to sell the same item at a lower price. It might seem like a bargain, but you'll lose the protections of operating through the online auction, and you may not receive the merchandise. Although auction losers sometimes get legitimate second-chance offers when an auction closes, make sure you still go through the auction site.

Beware of escrow
There have also been complaints about fraudulent escrow services. Be wary if a seller insists on a particular escrow service. Once you pay, your money may disappear from escrow into the seller's pocket before you get what you paid for. The seller and the fraudulent escrow service then disappear, too.

The same scheme may affect sellers who agree to use an escrow service that the buyer chooses. If the seller ships the merchandise and the escrow service turns out to be fraudulent, the seller may be without the goods and the money.

Payment scams
Sellers can also be the victims of fake checks or money orders, typically detected only after the goods have been mailed. In a variation on that scheme, a buyer might overpay for an item and ask for the money to be wired back. After you've returned the extra payment, your bank discovers that the check or money order isn't legitimate, and you're out the product payment and then some.

In general, most people who trade on online auction sites are trustworthy, but be on the lookout for the exceptions by heeding these cautions from the FBI and the FTC:

  • Before you bid, make sure you understand how the auction works and the obligations of buyers and sellers. Find out what protections the auction site offers, such as insurance or fraud protection, and whether the host takes any action if a problem arises.

  • If you're the buyer, learn as much as possible about the merchandise and the seller. Read the seller's feedback, and do some deeper research if the seller is a business. If you're buying a very expensive item, try to make contact with the seller by phone.

  • Get the details about shipping and delivery before purchasing something. Check with the seller if that information isn't provided. Find out whether the item can be returned and whether you'll incur shipping fees or restocking costs.

  • Except in very rare circumstances, you should never give excessive amounts of identifying information, such as your Social Security number or driver's license number, to a seller. If you're using an online payment or escrow service, check out the privacy policy and security measures. Call the customer-service line if you're even the least bit skeptical.

  • If you get a check or money order that exceeds the cost of the goods, send it back to the buyer and wait until you get proper payment before shipping the merchandise.

If you have problems that can't be worked out with the buyer, seller, or auction site, consider filing a complaint. You can turn to your state's attorney general, your county or state consumer protection agency, the Better Business Bureau, and the Federal Trade Commission. You can probably do that while still wearing your pajamas, too.

Related Foolishness:

Concerned about protecting yourself from fraud? In last October's issue of Motley Fool Green Light, Foolish expert Dayana Yochim reviewed some credit-watch products and came out with her recommendation for the best ways to protect your credit. Read all about it with a free 30-day trial to Motley Fool Green Light.

Amazon, eBay, and Yahoo! are all Motley Fool Stock Advisor recommendations.

Fool contributor Mary Dalrymple welcomes your feedback. She doesn't own shares of the companies mentioned in this article. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.