Ways Investors Can Recognize and Avoid Security Fraud


How Do Investors Avoid Ponzi Schemes and Similar Scams?

The SEC heavily regulates the stock market, but that doesn’t stop companies from committing fraud. Modern companies are required to be audited by a third party because businesses like Enron have forced the government to monitor accounting practices. Publicly traded companies are required to release a quarterly earnings report that details the company’s profits and losses.

If you’re working with a private investment firm, then you’ll want to be a lot more careful. Investment firms that make unrealistic promises may be hiding something from the public. Ponzi schemes are essentially just accounting fraud. The government provides a lot of incentives to whistleblowers if they are willing to stick their neck out and risk losing their jobs, but many large companies are so dense that it can be impossible to even recognize fraud when it occurs. You can protect yourself by looking at your chosen company’s internal ethical policies. Fraud likely won’t occur at Apple any time soon because the business has a toll free hotline that allows whistleblowers to call in anonymously to report something suspicious. Consider good ethical polices and accounting practices requirements for companies you invest in.


How Do I Avoid Getting Scammed by a Broker or Financial Adviser?

People invest in securities because they expect a significant return over time. Realistic stock market returns hover around 10 percent per year. If a broker guarantees you will get a 20 or 30 percent return, then there is a good reason to be suspicious. Many salespeople online will ensure buyers they have proven systems to beat the odds, but there are few guarantees in the stock market. Avoid working with unlicensed brokers. Financial advisers should understand your specific level of risk tolerance. If a broker seems to be putting the interests of a specific business over his client, then this may be a sign that he is doing something unethical. You should certainly conduct research on the firm you are considering selecting. If your broker doesn’t openly disclose the risks associated with a specific investment, then this may be a huge red flag. If you think that you have fallen into a scheme, check out this FAQ Securities Fraud Defense Attorney, that can answer some of your questions on that topic.


Are Penny Stocks Used to Defraud Investors?

Penny stocks appeal to many investors because they are cheap, but they are commonly promoted to defraud people. A blogger might start promoting a penny stock to drive the price up. People will buy the stock, and this will cause the market price of the stock to rise. The person committing fraud will then sell the stock at a premium. The investors will be stuck with their worthless securities as they eventually decline. Stock prices should always rise because a company is performing well. Not all stocks that sell for a penny are scams, but be weary if a person is using the low cost of the penny stock as a major selling point.

Also make sure to check this awesome primer video on the stock markets and the in’s and out’s of it: