Stock scam: adulting in the pure sense is building wealth to support goals such as homeownership, vacationing in a foreign land, living a luxury lifestyle, retirement, making charitable contributions, etc. To create a fortune, you should consider investing in high-return instruments. Instruments with compounding effects help you survive inflation and quickly go from rags to riches.
Real estate and stock are two of the most lucrative instruments. You can afford to invest in both if you are filthy rich. However, if you are an average-income earner, start creating wealth through stocks and then invest in properties when you have enough money. However, with high returns come risks, and the stock market is risky for the inexperienced and naive. The most significant risk is becoming a victim of a stock scam.
You may be questioning what stock scams are? Or, more importantly, how do stock scams work? Don’t worry, just follow this guide to the end; you’ll know everything, including how to protect yourself against one.
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Stock Scams Explained
It is a manipulative practice in which a fraudster, who might be a stockbroker, insider, trader, or anybody else, urges an investor to buy and sell stocks at an unjustified price. The fraudster makes the offer too good to pass up, and the investor succumbs to the temptation, becoming a victim of a stock scam. The victim incurs a loss and leaves with stock with little to no worth.
To escape falling prey to such fraudsters, conduct thorough research, seek advice from professionals, and make sound investing decisions. You must also educate yourself about the types of stock scams.
Types of Stock Scams
There are several types of stock scams you should be mindful of. They all differ, so here’s a list that explains each one, so you know how to identify if you come across one.
Ponzi scheme is a 100-year-old scamming tactic that dates back to the 1920s. The fraud scheme is named after Charles Ponzi, who introduced it. The fraudster raises funds from new investors in this scheme. Instead of investing the raised fund, con artists utilize it to pay inflated profits to previous investors. The cycle continues until investors demand to liquidate their assets or con artists no longer attract new victims.
Advance Fee Fraud
Suppose you have underperforming stock and want to sell it. If someone approaches you and offers you an excellent bargain for an upfront charge, it is a fraud. Once you pay the upfront cost to the person, he will vanish; and you will never find him again. That is the advance fee scam.
Pump and Dump Scheme
When a fraudster circulates misleading information about a particular stock to potential investors, it is a pump and dump stock scam. They heavily promote the stock through messages, phone calls, the company site, and other channels. They entice investors by bragging about how great the firm is doing. They sugar-coat about the firm to persuade investors to buy its stock.
Investors trust the con artists, purchase the shares, and push the stock price. When the stock price soars, the fraudster sells their shares. After successfully scamming, the con artists stop marketing the stock, leading the stock price to plummet dramatically. People who invest in it become victims and lose money.
The sole difference between a pyramid scheme and a Ponzi scheme is that current investors invite new people into the scam. They collect the funds and distribute the profits to the initial investors. When the cycle finishes, most investors lose a great deal of money.
Fraudsters in this area target the elderly, members of a particular group or organization, and people with similar backgrounds. They advertise the stock to members of, say, an ethnic community. The member then spreads the word in the group, and other members who trust him buy the little to no worth shares for an outrageous price.
Internet Stock Scam
The approach is similar to pump and dump fraud, except that a fraudster uses social media campaigns and other tools to promote poor-performing stocks that they own. They force people to buy shares, boosting the stock price. The con artists then sell the stock at a higher price, ceases online promotions, and the stock price falls.
Penny Stock/Microcap Scams
Fraudsters use Penny stock firms to defraud individuals through strategies such as pump and dump, online fraud, and others explained above.
Now that you are familiar with the many stock scams, you can easily protect yourself from them.
How to Prevent Stock Scam?
To protect yourself, keep an eye out for these red flags.
- Unbelievable offer – If someone claims to be offering a good deal on bad stock, be wary. Perform company research, obtain expert advice, and ask questions. If you have any doubts, don’t invest.
- Unverifiable facts – If you can’t verify the information a fraudster provides about the stock, it is a fraud.
- Advance fees – If someone asks for an advance fee, primarily through unusual ways such as Venmo, cash wire, and transfer, it is a fraud.
I cannot emphasize the importance of educating about the stock market and studying your broker and the firm you desire to invest in. If you suspect fraud, notify your bank, SEC, FINRA, your state’s securities regulator, and your state’s consumer protection office. Now you know how the stock scam works, so be cautious and good luck with stock trading.