How MagnifyMoney Gets Paid 

Advertiser Disclosure

Watch Out for These Common Stock Market Scams

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be
a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network
partners or the Investment company.

Written By

Peter Fleming
(Https://Www.Magnifymoney.Com/Blog/Author/Peter eming/) (Https://Www.Magnifymoney.Com/Blog/Author/Peterfleming/)

Reviewed By
  
Becca Stanek (Https://Www.Magnifymoney.Com/Blog/Author/Becca-Stanek/)

Updated on Thursday, December 17, 2020

Stock scams are a common way to separate stock market investors from their money. They often start simply and many times
they include promises of potential pro t that are too good to turn down.

But if these scams have anything in common, it’s that they usually end badly: The victim is left owning stock that has little or no
value, with the feeling they’ve been cheated. Here are the red ags to look out for so you don’t fall victim yourself — and the steps
to take if you suspect you have.

What a stock market scam looks like

How to avoid potential stock scams

What to do if you suspect stock fraud

Find a Financial Advisor

How much would you like to invest?

$1K $5K $25K $50K

(https://splitter.magnifymoney.com/api/sp
$100K (https://splitter.magnifymoney.c
$250K (https://splitter.magni
$1M (https://split
$5M
id=seo- id=seo- id=seo- id=seo-
(https://splitter.magnifymoney.com/api/sp
(https://splitter.magnifymoney.c
(https://splitter.magni
(https://split
investments&InvestableAssetsValue=2000
id=seo- investments&InvestableAssetsV
investments&Investab
investments
Findid=seo-
a Financialid=seo-
Advisor id=seo-
scams- investments&InvestableAssetsV
scams- investments&Investab
scams- investments
scams-
investments&InvestableAssetsValue=1250

What a stock market scam looks like

How can investors learn to recognize a potential stock scam? Perhaps the best advice is to educate yourself. Understand the
di erent types of scams you might fall victim to and how to steer away from them. And don’t be afraid to ask questions! Asking
the right questions and doing your research can help you avoid costly mistakes.

Here are some common types of stock market scams that all investors should be on the lookout for:
Pump and dump
We know how easy it is to spread false information about virtually anything, especially investments. Many fraudsters do that in a
scheme known as pump and dump. It starts with promoting a particular stock to potential investors by any means possible — the
company’s website, online investment newsletters, chat rooms, email, text messages, phone calls and fax. All methods typically
talk about how well the company is doing and may even tie into a real event, such as a new product or higher earnings, but add
false information to make the stock sound even better.

This campaign stimulates interest from investors who buy the stock and drive up the price. Then the people who started it all sell
their shares and stop promoting the stock, driving the price back down again. If new investors want to sell
(https://www.magnifymoney.com/blog/investing/investing-for-beginners/), they generally have to do so at a much lower price.

Ponzi scheme
These frauds are named after Charles Ponzi, a 1920s con man. In a Ponzi operation, someone at the center of the scheme collects
money from new investors. Instead of investing it, they use it to pay in ated returns to earlier investors. The scheme can go on for
quite a while, usually until the person at the center is no longer able to attract new investors or too many people want to liquidate
their investment.

Despite their nearly 100-year history, Ponzi schemes continue to this day. Back in 2009, Bernie Mado pleaded guilty to 11
felonies, con rming that he had defrauded his clients of nearly $65 billion over 20 years, making it the largest Ponzi scheme in
history.

Pyramid scheme
Pyramid schemes work much like Ponzi schemes, except existing investors recruit new people into the scheme. In many pyramid
schemes, “investors” make more from recruiting new members than they do for investing. As with a Ponzi scheme, their
investment is used to pay returns to earlier investors until the entire scheme collapses, with most investors losing money.

A well-known pyramid scheme from the 1980s involved United Sciences of America, which sold nutritional supplements through
distributors. The scheme preyed on common health fears and promised their products would protect people; it ended in 1987
when three states told the company to change its advertising claims.

A nity fraud
This type of fraud targets members of a particular immigrant, ethnic or minority group, church or religious organization, the
elderly, members of the military or similar groups of people with a common background.

The person o ering the deal may claim to be a member of the very same group they’re targeting. Investors often let their guard
down when they feel someone with a shared bond is o ering them a great deal, and make that deal without ensuring the
investment is legitimate or that the return claims are realistic. A nity fraud can involve virtually any investment, including stock.

Advance fee fraud

This fraud is fairly simple: You own an investment that’s been performing poorly and you want to sell it. Someone contacts you
with an o er to buy your investment at an excellent price. All you have to do is send them an advance fee for the privilege of
liquidating your investment. You send the money and never hear from them again — and nobody buys your shares.

Internet and social media stock fraud

This type of fraud involves spreading false or misleading “good news” about a particular stock using the tools available online such
as websites, social media posts, chat rooms, text messages and emails. The goal is to increase the price of the stock so the
originator of the disinformation campaign can sell their shares at a high price. Once that happens and the campaign stops, the
stock price is likely to fall (and may fall fast).
Penny stock scams/microcap fraud
Microcap companies are those with few assets and low-priced shares that trade at low volumes, also known as penny stocks
(https://www.magnifymoney.com/blog/investing/what-are-penny-stocks/). They are frequent targets for fraudsters looking for
companies to use for pump and dump and other frauds. In penny stock scams, those perpetrating the fraud buy shares at a low
price. They use a wide variety of means (as mentioned above) to raise interest in the stock and increase the price, then they sell.
When they stop promoting the stock, the price drops.

The Securities and Exchange Commission (SEC) frequently suspends trading in these stocks before they can become fraud targets.

Pre-IPO investment scam

Many investors want to get in on the ground oor of any potentially lucrative investment opportunity, especially an initial public
o ering (IPO) of a stock (https://www.magnifymoney.com/blog/investing/how-to-invest-in-ipos/). This type of scam o ers the
chance to buy so-called hot stocks ahead of the IPO. While there are legitimate o ers to buy shares before an IPO, unregistered
o erings may violate federal securities laws unless they meet a so-called registration exemption by only being o ered to investors
who meet income and net worth requirements.

Given the interest in owning IPO shares, this is a good time to ask “why me?” in terms of why they’re o ering you this opportunity,
as opposed to literally thousands of other investors.

O shore scam
These scams originate in foreign countries and target U.S. investors. They can involve any of the scams described above. Many
fraudsters use Regulation S, which says U.S. companies don’t have to register securities with the SEC if they are sold exclusively
outside the country to o shore or foreign investors. Some fraudsters violate this rule by reselling Regulation S stocks to U.S.
investors in violation of the law. And since they are outside the country, U.S. authorities have di culty in prosecuting them.

How to avoid potential stock scams

Although the internet has made it easier than ever to spread stock scams around the world, it’s also made it easier for the average
investor to research a potential stock deal to make sure it is legitimate.

Here are some tips investors can follow to keep their money safe.

1. Educate yourself
The more you know about stock scams, the easier it will be to spot one that nds its way to your inbox. Here are some red ags to
keep an eye out for — and run far away from:

It seems too good to be true. If a deal sounds too good to be true, it probably is. This doesn’t mean that every cheap stock is
a bad deal, but it shows why you have to do your research on the stock and the deal you’re about to get into.

There’s unveri able information. If a broker or fellow investor provides you with information regarding a stock trade — the
stock price, the company or their own credentials, for example — and you can’t verify those “facts” with another source,
there’s a strong likelihood it’s fraudulent. Brokers must be registered with the SEC and the Securities Investor Protection
Corporation (SIPC). The SEC and SIPC websites are also great resources for stock and broker information.

You’re asked for advance fees. Fraudsters may ask for advance fees for their “services.” Be wary if you didn’t know about
the charge beforehand, or if they ask you to pay via unconventional methods (such as cash wire, transfer or Venmo). Only do
business on reputable sites and with credentialed individuals and businesses.

It also helps to read articles, conduct stock research online (https://www.magnifymoney.com/blog/investing/how-to-research-

stocks/) and talk to other investors. The SEC also maintains a page of bulletins and alerts
(https://www.sec.gov/investor/alerts/enforcement) to keep you up to date on the latest scams.
2. Ask yourself, why me?
If someone o ers you an investment that sounds too good to be true, ask yourself why, among thousands of investors who might
be interested, did someone o er you this chance to invest? Many times, the answer might be that they thought you would be easy
to scam.

Go with your gut if something doesn’t feel right — and get out fast.

3. Investigate investments that come through untraditional channels

If a broker from a reputable rm you’ve worked with for many years calls to o er you a great deal, chances are it is legitimate. But
if you get a call from someone you’ve never met, do some research before investing.

Google the investment. Ask the caller if you can talk to other investors. Check with organizations like the Financial Industry
Regulatory Authority (FINRA) and the SEC to make sure there are no complaints against the people sponsoring the investment.
The more questions you ask, the better the chance you’ll nd a legitimate investment.

4. Be cautious about o ers of high returns with low risk

When it comes to investing, there’s always going to be some risk and typically, high returns come from high risk. While there are
still some undiscovered gems out there, it’s unlikely the promise of a novelty stock with high returns but low risk will pan out well.
The chances of coming across a gem like this are even lower if someone you don’t know is contacting you with an o er. Check out
every investment opportunity carefully.

5. Take your time

Don’t be pressured into investing in anything immediately. Chances are if someone wants you to invest quickly, there are some
details they don’t want you to know about. Take as much time as you need to research a potential investment before you decide
to invest. Ask questions and get answers.

What to do if you suspect stock fraud

If you suspect a stock scam or have already fallen victim to one, you must act quickly. It isn’t guaranteed that you’ll recover any lost
money or the fraudsters will get caught, but your odds are much better the faster you notify the authorities.

Here are the steps you should take:

Contact your bank. If you’ve already made a payment to a bad actor, tell your bank about it as soon as you can. Otherwise, you
may miss the short window of time within which you can get your money back. Note this applies to electronic payments; your
bank’s unlikely to be able to help you if you handed over cash.

Flag the scam for investment regulators. Not only may this help you, but it may also stop the scammers and prevent others
from falling victim. These are the appropriate agencies to contact:

The SEC (https://www.investor.gov/contact-us)

FINRA (https://www. nra.org/investors/have-problem)

Your state’s securities regulator (https://www.nasaa.org/contact-your-regulator/)

Your state’s consumer protection o ce (https://www.usa.gov/state-consumer)

Notify local law enforcement. Bringing law enforcement into the picture may result in catching the scammers. Filing a claim with
law enforcement also helps create a paper trail, which is useful in such situations.

Consider enlisting an investment fraud lawyer. An investment fraud lawyer can help advise you on how to best handle the
situation — especially if the legal aspect escalates. However, don’t forget that lawyers can cost a pretty penny, and if you’ve
already lost sums to the fraudster, hiring an expensive lawyer may not be your best nancial course of action.