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Serving members worldwide since 1935.
Lynn EnglishWritten by:
Lafayette Federal Credit Union
Senior Vice President, Risk Management

Investing in the stock market is an excellent way for individuals to grow real wealth and save enough money for retirement. Of course, investing is also inherently risky. And unfortunately, the rise of stock market scams makes it even more difficult for investors to spot a good investment from a bad one.

Although the internet has made it easier for scammers to target investors online, it also provides a way for investors to learn about stock scams and research the legitimacy of investments they’re considering.

6 Common Stock Market Scams

Stock market scams have been around since the birth of the first stock exchangesOpens in New Window. Over the past two decades, stock transactions and trading have migrated to online platforms. Today’s investors need to be even more aware of online stock market scams and investment fraud, which have only increased since the onset of the pandemicOpens in New Window.

Below are six common stock market scams that can strike unwitting investors in today’s online environment. Luckily, a little education goes a long way in recognizing and avoiding these types of scams.

Pump and Dump Scams

Pump and dump scams, also known as market manipulation, occur when fraudsters purchase low-value stocks, and then spread false information about them in an effort to drum up enthusiasm and lure investors into buying them. This scam typically only works with low-cost stocks (also known as penny stocks or small-cap stocks).

The scammer’s ‘recommendations’ to purchase these stocks are based on false or exaggerated claims about potential returns, all to bait investors into buying the stocks at high demand for increasingly higher prices. Once the stocks hit a high point, the scammer will sell their shares at an enormous profits. Inevitably, the stock price falls again and leaves the scammed investors with considerable losses.

These scammers are savvy at creating false hype on specific social media platforms/groups that investors follow. Two social media sites scammers that they often target include the forum and discussion platform RedditOpens in New Window and the popular communication platform DiscordOpens in New Window. Using these social media platforms allows scammers to target a huge amount of potentially interested investors and create frenzied enthusiasm relatively easily.

Cryptocurrencies are particularly susceptible to pump and dump scams. Cryptocurrencies are relatively new types of investments and are unregulated by the SEC. Additionally, a large concentration of cryptocurrency is held by a small number of individuals. For these reasons, pump and dump fraudsters find it relatively easy to scam many crypto investors out of money.

Ponzi Schemes

Like pump and dump scams, Ponzi schemes have been around for a long time. Ponzi schemes are named for Charles Ponzi, who was an Italian swindler and con artist in the U.S. and Canada in the 1920s. Even though these schemes have been around for over 100 years, unfortunately Ponzi schemes continue to deceive unsuspecting investors today.

A Ponzi scheme occurs when an individual (or group of individuals) collects money from new "investors” with the promise of high returns on their investment. To make it seem legitimate, the scammer(s) will promise investors that their money will be invested in a business venture or otherwise managed in the stock market. Instead, Ponzi schemers use the money from the new "investors” to pay inflated "returns” to earlier investors.

It’s when the stream of new "investors” dries up – or when too many investors attempt to get their money out – that the Ponzi scheme collapses. Those at the bottom are out of luck. In 2008, the largest Ponzi scheme to dateOpens in New Window was uncovered, exposing financier Bernie Madoff who scammed his investors out of more than $65 billion.

Pyramid Schemes

Pyramid schemes are similar to Ponzi schemes, but differ in the fact that new investors are usually required or encouraged to recruit investors themselves to see any returns or profit. Pyramid schemes are often well-disguised as multi-level marketing companies. Like Ponzi schemes, pyramid schemes fall apart when no new "investors” can be recruited.

To distinguish between a pyramid scheme and a legitimate multi-level marketing company, you must look at how company representatives actually get paid. If representatives get paid primarily by recruiting new representatives, chances are it’s a pyramid scheme. On the other hand, if representatives make most of their income selling the company’s products to consumers outside the company, it may be a legitimate business.

High-Yield Investment Fraud

High-yield investment fraud (also known as high-yield investment programs (HYIPs)) occurs when representatives promise investors exorbitant returns for little to no risk. Especially during periods of market volatility, fraudulent certificates of deposit (CDs) are often proposed to those seeking less risky investments with a fixed rate of return.

High-yield investment scammers will even go so far as to mimic legitimate financial firms’ websites. Their hope is to trick investors into thinking they’re investing in a familiar institution’s CD or annuity products.

If you come across a financial institution that doesn’t offer any other products or services, doesn’t institute a penalty for early withdrawal of funds, asks investors to wire money to an offshore account or an investment firm with a different name, or just seems off in another way, beware. This may be a type of investment scam.

Affinity Schemes

Affinity scams target specific groups of people. These groups might include religious, ethnic, or cultural groups, immigrant communities, military members, the elderly, LGBTQ+ communities, and other groups that share similar identities.

Oftentimes, the scammer will claim to be a member of the group they’re targeting to build trust with their potential victims. Because it’s easier to disguise yourself online, scammers often hoodwink their victims, especially those who are vulnerable, in this way. These scammers will usually pitch a fraudulent investment "opportunity” to this group with promises of high returns.

Advance Fee Schemes

Advance fee schemes target investors who have already made costly investment mistakes. If you’re holding an investment that is performing poorly, a fraudster may reach out to you with an offer to purchase your investment at a price that far exceeds its value. For this scam to work, fraudsters will require you to send them an "advance fee” to pay for the purchasing service.

Often, an advance fee scammer will ask you to send money electronically, such as through a cash wire transfer or a third-party payment platform like Venmo or Paypal. If you pay that "advance fee,” you’ll likely never see that money again. And unfortunately you’ll still be stuck with your poorly performing investment.

The scammers know these potential victims are already emotional, and they often have an easier time hoodwinking desperate and scared victims into sending them money. Be cautious of someone who reaches out and may be over eager to purchase a poor performing investment from you.

How to Avoid Being a Stock Market Scam Victim

Simply being educated about the different types of stock market scams can help you spot a potential problem. After reviewing the information above, you may feel more prepared to recognize those scams before you make any risky transactions. Here are some other things you can do to prevent yourself from becoming a victim of a stock market scam:

Thoroughly Investigate Any Unsolicited investment Opportunities

Any time someone reaches out to you with an unsolicited investment offer, you should be wary. Ask yourself why they might be reaching out to you. Are you in a particularly vulnerable situation in which a scammer might consider you an easy target? Do you identify with a group or community that may be a target for affinity schemes? If your answer to either question is "yes,” proceed with caution.

You should also do some research on the person or firm offering the investment. Verify the license of the person selling the investment by searching the U.S. Securities and Exchange CommissionOpens in New Window (SEC’s) Investment Adviser Public Disclosure website. Simply type in the name of the investment representative to see if they are licensed by the SEC, the state they work in, and/or the Financial Industry Regulatory Authority Opens in New Window(FINRA).

You can also Google the investment to verify things like the stock price or the firm offering the investment. If you ask to speak to other investors or to review the prospectus or offering circular, the firm should be able to fulfill your request. If the person selling the investment claims those aren’t necessary or refuses to provide what you are looking for, the investment may be a scam.

Beware of Offers That Promise High Returns for Little to No Risk

There is no such thing as a no-risk investment. Investment scammers, however, will do their best to appeal to investors’ desires to make a lot of money without risking their initial investment. Licensed investment brokers are very transparent about the fact that all investments carry inherent risk.

If a deal sounds good to be true, it probably is. It’s imperative to research your investment opportunities and fully understand the risks associated with individual investments you’re considering. And if someone is claiming they have insider knowledge or is spreading "hot tips” about the stock market, be wary that it may be a stock scam.

Take Your Time Making a Decision

Scammers do their best to pressure their victims to act quickly. This is so victims don’t have time to thoroughly research the investment or discover details that reveal the scammer’s fraudulent intent. Beware of investment opportunities that are high-pressure and demand you to make a decision now.

Talk to a Third Party

It never hurts to ask for a second opinion. Before investing in an opportunity you’re not sure about, get the opinion of a trusted third party such as a fiduciary financial advisor or an investment professional at your local credit union or bank. At Lafayette Federal Credit Union, our impartial Financial Advisors Opens in New Windoware here to listen to your financial needs and provide guidance to help you make informed decisions.

What to Do if You Think You've Been Scammed

If you believe you’ve fallen victim to a stock market scam, it’s important to act quickly. There’s no guarantee that you’ll be able to get your money back, but the faster you act, the higher the chance authorities will be able to help.

First, contact your financial institution. If you made an electronic payment to a fraudster, your bank or credit union might be able to stop the transaction if you’ve contacted them early enough. Additionally, if you provided any personal information to the scammer, your financial institution can help you take the necessary steps to protect your identity and your assets.

Next, report the incident to the appropriate authorities. Stock market and other investment scams should be reported to the following agencies:

  • The SEC
  • FINRA
  • Your state's securities regulator
  • Local law enforcement
  • The Internet Crime Complaint Center (IC3) (if the scam took place online)

And remember, falling victim to a scammer can happen to any investor at any time. It’s normal to feel ashamed or embarrassed after you’ve been scammed, but perfectly intelligent people fall victim to scammers every day. There is nothing to be ashamed of.

In fact, talking about your experience can help lessen those feelings of shame and protect others from being victimized in the future.

Better Protect Yourself by Partnering With Lafayette Federal

At Lafayette Federal Credit Union, we care about our members’ online and financial safety. Our team of Financial AdvisorsOpens in New Window is trained to provide you with advice and guidance to help you reach your financial goals.

If you have concerns about a potential scam or believe you may be a victim to one, don’t be afraid to ask questions. Come into a branch or learn moreOpens in New Window about protecting your identity online at Lafayette Federal.

Not a Lafayette Federal member yet? You can become a member by completing an online membership applicationOpens in New Window.

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