How to spot a scam investment

174 Comments / Finance

Any investment opportunity that seems too good to be true, it’s probably a scam. Before you invest you should ask yourself if you are willing to lose some or all the money you have invested and know that if you go ahead you are investing with little or no protections behind you.

Unrealistically high investment returns.

Not all investments who offer high investment returns are a scam but you first need to understand the market average of that particular investment option or asset. When the return you’ve been given is maybe 3% or 4% higher than the market average that investment is unrealistic.

For instance the money market fund is offering about 7%-9% market average so if a fund comes and gives you about 14% of money market fund then it’s not realistic. There are two instances when the return can be higher than the market average, one, either they are taking a lot of risk with your money because because the higher the risk the higher the return then two, that investment scheme is a scam.

There’s get rich quickly scheme.

In investing there’s no short cut. One needs to understand the financial logic behind the get rich quickly. It’s not sustainable in the long term. Most schemes create an impression that participants can obtain this high rate of return with little risk, effort and time.

Lack of understanding of the underlying asset of investment.

For instance if you invest your money in stocks or equity the underlying asset is equity, if you invest in money market fund you understand your money goes to treasury bills or short term securities so basically one should understand the underlying asset of your investment so that you know where the returns are being generated from.

Lack of financial logic and clarity of how returns are being generated.

It’s not enough to just know the underlying asset of your investment, you should also cross examine the returns they generate and compare it with what the actual market is generating via that asset. Like no company can invest in an asset that generates 8% returns and they tell you that they’ll give you 14%. There’s no financial logic in that.

Everything about investment is about recruiting more people.

In every investment there has to be an asset and where your money is put in order to generate you a certain income so you should ask yourself how recruiting more people in the investment generate you a return.

The income is based on recruiting people and not on revenue or return

This means there are no sales or assets that you put your money in to generate you an income, the income you get is solely based on the number of people you recruit to the investment who put a certain amount of money into that investment.

So in order not to be caught up in such ensure you have your financial goals because that’s where investing starts, educate yourself about how different investments in the market work, match your financial goals with your investment choice and finally take into consideration the risks you can take. Before anyone invests they need to make sure they speak with a regulated financial adviser who understands where their money is going. Only take risks you can afford to lose and act only on written accommodation.

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