Is This an Investment Or a Scam?

Some guidelines for what does (and doesn't) make an investment worthwhile.

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Miranda Marquit

Sometimes, it can be difficult to determine whether an “opportunity” is an investment or scam. Part of the difficulty comes in the fact that, so often, a scam is presented as an investment. Rarely does a scammer hold up a sign emblazoned with the words, “This is a scam!” In fact, a good scammer is likely to hook someone close to you and then get him or her to convince you that you are getting in on something good.

Before you commit your money to any “investment opportunity,” make sure that you are really dealing with an investment—watch out for signs that you might be a mark for a scam.

What Makes a Good Investment?

It’s important to understand that all investment carries with it the chance of loss. You could lose your money even in a solid investment. And that is one of the first indications that you could be dealing with an actual investment. Scrupulous brokers and advisers will tell you that there is the chance that you could lose money. Other indications of a good investment include:

  • It’s easy to understand how it works: Too often, investors get caught up in a fancy-seeming investment that they don’t really understand. If the investment can’t be explained in a simple, direct manner, stay away. Only invest in assets when you know how they work.
  • There’s potential to earn a reasonable amount of money: Look for something that is likely to offer returns over time. Watch out for claims that you will become fabulously wealthy in a short period of time.
  • It comes with acceptable levels of risk for you: Don’t invest money you can’t afford to lose. Check your risk tolerance and stay away from investment decisions that would result in complete financial disaster if they go sideways.
  • It’s got solid fundamentals: Look at the “big picture” factors that support the investment. Do your research to find out how long that company or fund has been in existence. Consider things like performance, cash flow, management, and macro factors. If you understand how the investment should work, you will understand how the fundamentals are likely to influence its value.
  • Truly, you are better off starting with the simpler investments, and trading through an online discount broker. Keep it simple, and straightforward, and you will be less likely to find yourself victimized by a scammer.

    A businessman picking another businessman's pocket. A scam to get someone's money.

    Signs that it Could be a Scam

    Even while you consider the merits of this “opportunity,” watch for red flags indicating that you could be dealing with a scam. First and foremost, consider whether or not the deal seems too good to be true. This is a dead giveaway for an investment scam. No legitimate investment comes without risk, and you aren’t very likely to make money hand over fist in a short amount of time.

    However, some scammers are more careful about how they present themselves. So you might have to be even more on your guard. Be wary of the following tactics:

    • You’re approached by someone you know: Often, scammers use someone you know to draw you in. This person might have even seen some “gains” and is bragging about them. Watch out when someone you know seems a little too interested in making sure you invest.
    • There’s pressure to buy in immediately: Most legitimate investment opportunities will still be around next week. If there is a lot of undue pressure to make a decision right now, your decision should be “no.” The pressure to decide quickly, before you can think it over, is a prime tactic used by scammers to get you to hand over your money.
    • Promises that you’re getting the inside track: Whether it’s someone promising that you will have access to the next hot IPO, or that you can get in on the ground level of a new startup, watch out. Anytime you are suddenly “promoted” to the status of “insider” you could be looking at a scam.
    • It’s nice to feel like an insider, and tempting to think that you are about to make tons of money with very little work. However, you need to take a step back, and realize that what you could be looking at is a scam. It’s not glamorous to take a dollar cost averaging approach and invest at a basic level, but you’ll be less likely to lose your money to an investment scam.

      Miranda is a freelance contributor to several investing and personal finance web sites. She also writes for her own blog, Planting Money Seeds.