The stock market could be a great way of making money when you are a shrewd investor. If, however, you are not careful or experienced enough, you can end up drawn in one of the many scams that lurk in the investment landscape. People usually think that it is something that can never happen to them, but they are wrong. Absolutely anyone can be fooled by these con men and women, because they are good at what they do, and if you are not familiar with the potential scams out there, you can easily become their prey.
Do Your Research
Before talking about the three of the most common stock scams, and the possible ways of avoiding them, lets take a look at some precautionary steps. First and foremost it is important to research the company you are planning to invest in well. Get the details on a companys revenue, growth projections and history, learn their recent acquisitions and make sure that the investment broker is registered. Do a quick Internet search of the company name or its CEO and other principals to see what turns up. Check out if the company officials have got a criminal record, etc. You should also check the stock symbols carefully, especially if the symbol ends in the letter Q, because when a company enters bankruptcy, the Q is often added to its ticker symbol.
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One of the most common schemes today is certainly the Ponzi scheme. What happens is that a company offers very high profits in a short period of time in exchange for a lower investment. Firstly, the scheme will take money from new investors to pay off the old investors. Then, the old investors will be asked to invest more money for even larger returns. Once a large payment is taken from several investors, the company will suddenly disintegrate and the owner will disappear without a trace. Now, the question is how to identify a Ponzi scheme? And the answer would be to pay attention to the companies that offer high returns, require consistent payments, and have a weak company history.
Pump-and-dump scams are unique in that they do actually result in stocks with increased values. Con artists will use several techniques to convince people that a low-priced stock is the opportunity they wouldnt want to miss. When people believe this, they start purchasing shares, which actually makes the price of the stock go up. At this point, when the prices are pumped up, the con artists sell off their own shares. Soon thereafter, those who were fooled realize that the stock they bought was actually worthless. Pump-and-dump stock scams are most commonly found online, and the first thing to do is consider the source. Trust only established and reputable sources.
Bait and Switch
The third of the common stock scams, and also the most difficult to identify, is the bait and switch scam. The way the bait and switch operates is by offering clients an investment in securities or bonds that is relatively cheap. After the fraudsters take the money, the funds will be directed into another, more-expensive investment. This money is often used to artificially pump up another company’s price for use in one of the stock scams mentioned above.
Stock market scams are not common, but they can happen to anyone. Be sure to take all the proper safety measures, and you will be safe. Research is always the key in avoiding these traps. As always, anything that sounds too good to be true usually is.