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Protecting against Internet investment scams

The Internet is a powerful tool to research investment opportunities. It's also a popular place for scammers to find their victims.

Here are a few of their favorite tricks:

  • Emails promoting investment ideas that only benefit the sender
  • Newsletters hyping specific stocks while claiming to provide honest and unbiased advice
  • Online posts pumping a stock with "inside" or "secret" information about a company's results or new products
  • Fake websites that look just like legitimate ones

The signs of a scam

The Internet can make it difficult to distinguish between fact and fiction. It's always important to verify your information before making an investment.

First of all, never make an investment based only on your online sources. And then watch out for any of these telltale signs of a scam:

  • Promises of high returns with no risk or very little risk
  • Assurances of a fast return on investment
  • Terms like "guarantee," "limited offer," or "safe as a CD"
  • Offshore investment ideas, especially ones that involve tax avoidance
  • Small or "thinly traded" stocks you only read about on the Internet
  • Alternative investment ideas like commodities, real estate, coins, artwork or gemstones
  • Irregular reports with the Securities and Exchange Commission (SEC). You can access the SEC's database of reports at sec.gov/edgar.shtml (opens in a new tab).

Common types of Internet investment scams

The SEC reports that most Internet scams follow the same formats and have been around for years. Here are the main types of scams to be aware of according to an article from the SEC's website:

The "pump and dump" scam

It's common to see messages posted online that urge you to buy a stock quickly, or that tell you to sell before the price goes down. Often, those posting the message will claim to have inside information about an impending development. Or, they'll claim to use a foolproof combination of economic and stock market data to pick stocks.

In reality, those posting the message stand to gain, either as insiders or paid promoters. After the stock price is pumped up by naive investors, the scammers just sell their own shares. Once they stop hyping the stock, the price typically falls and the investors lose their money. Scammers frequently use this ploy with small, thinly-traded companies because it's easier to manipulate a stock when there's little or no information available about the company.

The pyramid

Sometimes, messages appear online that seem to overpromise. These might be messages such as, "How to make big money from your home computer," or "Turn $5 into $60,000 in just three to six weeks." Typically, these programs function as pyramid schemes in which participants attempt to make money solely by recruiting new participants into the program.

The "risk-free" fraud

"Exciting, low-risk investment opportunities" are a common sight on the Internet. They're usually for investments that sound exotic. However, no investment is risk-free, and sometimes the investment products touted don't even exist—they're merely scams. Be wary of opportunities that promise spectacular profits or guaranteed returns. If the deal sounds too good to be true, then it probably is.

Off-shore frauds

At one time, off-shore schemes targeting US investors cost a great deal of money and were difficult to carry out. Conflicting time zones, differing currencies and the high costs of international telephone calls and overnight mailings made it difficult for fraudsters to prey on US residents. But the Internet has removed those obstacles. Be extra careful when considering any investment opportunity that comes from another country, because it's difficult for US law enforcement agencies to investigate and prosecute foreign frauds.

Using common sense

You should be skeptical and use your common sense when you evaluate the investment ideas that you find on the Internet. Here are two questions that you should always ask:

  • Does this sound too good to be true?
  • What makes me so lucky to get this offer?

By asking these questions and using common sense, you can protect yourself from being the victim of an Internet investment scam.

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