Skip to main content

Investment Risks (Tips from the Federal Trade Commission)

Posted on Tuesday, July 19, 2022 in Financial Education

Investment Risks (Tips from the Federal Trade Commission)

Promoters of alternative investment and money-making opportunities sometimes make their deals seem like a sure thing. The truth is that the higher the potential reward, the higher the risk. Don't do business with someone who tries to convince you otherwise.

[Investment risk] Dishonest promoters often are vague about the nature of the investment and focus instead on the money you'll make. To close the deal, they cite phony statistics, exaggerate the significance of a current event, claim they will guarantee the investment, or stress how unique their offer is. And they almost always try to rush you into a decision.

Investment decisions demand your time and careful consideration.

Before You Invest

Take your time. Using sales scripts, scam artists may create the impression that only a few shares or partnership units are left in a "sure-fire" investment. They try to convince you that you'll miss out on a big opportunity if you don't send them thousands of dollars by overnight courier or money transfer. But if you do, you will lose your money. They insist on money transfers because it is nearly impossible to trace the money or get it back.

Do some research. It's best to get an independent appraisal of the specific asset, business, or investment you're considering. An appraisal offered by the promoters could be fake. Talk to the previous owners of an asset or business for its history, but be aware that some dishonest promoters hire "shills" — people who lie about their success with an investment to convince you to buy it. Discuss all investment ideas or plans with an accountant, an attorney, or another advisor you know and trust.

Be skeptical. Scam artists lie. Their success depends on having an airtight answer for everything.

Don't let appearances fool you. For a few dollars, anyone can incorporate an entity. Scammers can produce slick promotional materials, or buy a toll-free number.

Sales representatives should tell you the risk of particular investments. Honest risk disclosures may say you could lose your whole investment. Be particularly suspicious of sales pitches that play down risk or portray written risk disclosures as routine formalities required by the government. Later, when you try to recover the money you lost, dishonest promoters could use those same risk disclosures against you.

Find out who you're dealing with. Can you find published information about the company in which you're investing, or someone you trust who has heard of the company? Do an internet search with the name of the company and words like review, scam, or complaint. Look through several pages of search results.

It's wise to check with law enforcement agencies in the community where the promoters are located, but keep in mind that it may be too soon for the company's victims to realize they've been defrauded or to have filed complaints. Dishonest promoters often operate a particular scam for a short time and close down before they can be detected. Often, they reopen under another name, selling another investment scam. In addition, they may lie about their name or their business history, or even pay people to be "references."

Ask if the investment has a track record. Scam artists often use news stories about the success of legitimate companies as bait by claiming that their "opportunity" is similar to that of a "hot" money-maker. Unfortunately, success stories of other companies in the field are irrelevant for your purposes. Get the track record of the company you're considering investing in and the background of the people promoting it.

Get details. Legitimate companies account for investors' money at all times. Ask for written proof of how much of your money is going to the actual investment and how much is going to commissions, promoters' profits, and marketing costs. If most of your money is slated to cover expenses and costs, much less will be available to earn a return.

Back to Top