Learn About Investment Fraud, Scams, and Risks

Protect yourself from some of the most common investment scams and fraud. Learn about the other risks associated with investing.

Investment Fraud

• Affinity Fraud: This type of fraud refers to an investment scam that preys upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional associations. People who promote affinity scams frequently are, or pretend to be, members of these associations. They may even enlist respected leaders from within the targeted groups to convince others that a fraudulent investment is legitimate and worthwhile.

Investment Scams

• Ponzi Schemes: A Ponzi scheme relies on new investors to pay earlier investors. Fraudulent portfolio or investment managers lure investors on the promise of low risk and high returns, but the money is never really invested. In most cases, the manager steals the funds for themselves, and when an investor asks to withdraw their money, the manager uses another investor’s money to pay them back. This type of scheme eventually falls apart with investors’ money wiped out.
• Pump and Dump Scams: This type of illegal securities fraud involves artificially inflating the price of a stock through false and misleading positive statements to sell the stock at a higher price. Once the fraudsters dump their shares and stop hyping the stock, the stock price typically falls and investors lose money.
• Pyramid Schemes: Recruitment is key to pyramid schemes. Like Ponzi schemes, they rely on money from new investors to pay existing ones. But unlike Ponzi schemes, the people at the top must continue to recruit more people, who then must recruit more people to continue the scheme. New investors often must pay a fee and recruit others to earn extra money or commissions.

Other Risks

• Debt: Debt occurs when you owe money to a person or business. Loans, notes, bonds, and mortgages are forms of debt that usually must be repaid with interest. Never invest more than you can afford to lose, as that may cause you to fall deep into debt and affect other aspects of your financial wellness.
• Liquidity: This refers to how easy it is to buy or sell an investment. Liquid investments can be sold without incurring a big fee, so you can gain access to money when you need it. Some investments have less liquidity than others. A CD for example, is an investment that will incur a penalty if you try to gain access to it before the term is up. Meanwhile, there may be some stocks that are easier to sell than others, depending on performance and market volatility.
• Market Volatility: This refers to the fluctuation (the rise and fall) of market prices and investments. The more volatile a market is, the more risk is involved with investing. Some investments are more susceptible to market volatility than others, so be sure to monitor exchanges like the NYSE, Nasdaq, Dow Jones, crypto exchanges, and more to see how an investment is being affected.
• Pressure: If a broker, advisor, or salesperson is using high-pressure sales tactics to force you to make an investment, consider that a red flag. Do your own research and verify their credentials or the investment with the DFPI.