Common Stock Scams - How To Avoid A Stock Scam

[savio13]

There are a lot of pundits out there that offer investing tips for a fee. While some of these investing services may be well worth the money, others are scams are certainly close to a scam.


In this article, I’ll detail what I view as the five most common signs of a stock scam:

1. A ‘get rich quick’ mentality. Most investing scams will act as if you can turn a few thousand dollars into millions in the market. This is practically impossible. Even a yearly 20% return will take decades before you can turn a few thousand into millions. Most of these ‘get rich quick’ scams will actually try to claim they aren’t a ‘get rich quick’ scheme! Don’t fall for it. If you are led to believe you will be a millionaire with a few thousand bucks in a few years, run.

2. They talk about individual trades rather than yearly returns. Most stock scams aim to dupe the newbie investor. They know that knowledgeable investors won’t fall for the scam, so they try to keep it simple. Most people are impressed at the idea of making $5000 or more in one day due to one trade. Of course, that means nothing. If you have a million dollars, $5000 is only a .5% return, which could be an average daily move. Also, an impressive investor is measured as someone who beats the market over time, not one who makes a few lucky trades.

3. They talk about 100% or more returns in months. Achieving this is virtually impossible without taking a lot of risk and getting very lucky. Even the best hedge fund managers struggle to make much more than 30% a year, and anyone who consistently makes 20% or more a year is amazing. Do you really think some class can teach your average shmo how to make 100% or more in a year?

4. They utilize options. Options are a complicated, risky instrument that should only be used by experienced traders. Most scams use options since they allow for amazing returns when you get lucky. Of course, the flip side is that you can easily lose your entire investment in any option. Newbie investors should never trade stock options.

5. They utilize penny stocks. Like options, penny stocks involve a lot of risk. There can also be a lot of fraud involved in these stocks. There is less SEC oversight for these types of stocks, and they are sometimes used as part of pump-and-dump schemes.