Investment fraud is one of the most costly threats facing investors today. In 2024 alone, the Federal Trade Commission (FTC) reported that Americans lost $5.7 billion to investment scams, a 24% increase over the prior year. The tactics are constantly evolving, and vigilance is a must. Protecting yourself begins with basic research, understanding what to look for, and recognizing common traits of investment fraud.
Why investment scams still work
Even the most financially intelligent and well-read people are still vulnerable to financial fraud and scams. Fraudsters often tailor persuasion techniques to psychological triggers such as urgency, trust, and fear of missing out.
Social media has also become a powerful tool for scammers. Some social media posts from legitimate companies may well contain useful information and relate to legitimate investments, but the United States Securities and Exchange Commission (SEC) advises never to rely solely on those sorts of online posts, testimonials, and customer reviews.
Common types of investment scams
In some cases, financial fraudsters may attempt to impersonate real firms or legitimate advisors. According to the SEC’s Office of Investor Education and Assistance (OIEA), there has been an uptick in complaints about scammers impersonating investment professionals and advisors sometimes coupled with fake websites or calls from a spoofed phone. One common warning sign is when someone insists on moving communication to encrypted messaging apps such as WhatsApp. Also, if you receive an email with an offer, check where the email is coming from. Does the email and/or email address seem to be unrelated to the individual’s firm, or is it a generic Hotmail or Gmail account? That’s a red flag.
A few of the most common investment scams, according to the FTC, include:
Cryptocurrency scams. These will often start out with a direct message via social media, claims of big returns, and a direct link to a site or an app through which you can invest.
Investment training scams. Training programs or investment seminars often revolve around a lot of hype to get you to join. They will often include fabulous success stories of people who have taken the course and achieved success, but the information in the “training” is often worthless or has a requirement to subscribe to a separate paid program.
Real estate investment scams. Promotional advertisements touting new developments often are designed to get you to buy property. Real estate can indeed be a legitimate investment, but before you buy, ask questions. You may find out after it’s too late that the property may take years to build, lacks the amenities described, or may never get built.
Precious metal investment scams. Like real estate, precious metals can be a legitimate asset class. But scammers may take advantage of what might otherwise be a worthwhile investment, by making outrageous claims and inflated growth projections, creating a sense of urgency or selling bullion at a larger-than-standard premium.
Sales pitch investment scams. Be cautious of high‑pressure pitches, secret methods, minimal details, or demands to act immediately—these are all hallmarks of a potential scam. Fraudsters often promise extremely high or “guaranteed” returns and use sales tactics disguised as “once‑in‑a‑lifetime” opportunities or free investment seminars that may be more pressure than substance.
Unsolicited offers. Out of the blue emails, calls, texts and social media messages, especially those full of hype, deserve extra scrutiny. If something interests you, look for independent information.
Five questions to ask before making any investment
Asking questions, and lots of them, is an important first step in crafting an investment strategy and safeguarding against fraud. Here are a few key questions to ask when you begin your due diligence process:
How does this investment make money? Legitimate investments have a clear and understandable business model. If you can’t explain in plain language how returns are generated, then that’s a red flag.
What are the risks? All investments involve some degree of risk. First of all, get comfortable with your risk tolerance. Exercise caution if risks are minimized or glossed over.
Is there independent, verifiable information about the company and opportunity? The marketing materials, company brochures, social media posts and “investment seminar” hype may not tell the whole story. Can you confirm claims through third-party sources and regulatory filings, or other reputable news stories?
Who is promoting the opportunity and how are they paid? Who is pitching the investment to you and how do they benefit financially? Getting paid to get investors isn’t in itself necessarily a red flag, but nonetheless, transparency about compensation matters.
Why the sense of urgency? Many fraudulent investment opportunities include an “act now” sense of urgency. If it’s a legitimate investment, chances are it will still be there after you have done your independent research.
How to do your own due diligence
Due diligence simply means researching an investment before committing your money. It’s important to understand what due diligence is, and what it is not. Things like unsolicited emails, message board postings, company press releases, and casual advice from well-meaning friends and relatives do not count.
The SEC recommends a few common-sense tactics:
Take time to understand the company offering the investment and review reputable sources. Look for the company’s financials on the SEC Edgar filing system.
Who is it that is advertising the investment? Are they licensed to sell securities, or have they or their firms had any trouble with regulators in the past? The SEC and Financial Industry Regulatory Authority (FINRA) both have publicly available information on the disciplinary history of brokers and advisors.
Take time to understand the different types of fraud, and the red flags to watch out for.
What to do when something feels off
If you think you’ve encountered something fraudulent, the first thing to do is hang onto your wallet. The second thing to do is contact the SEC, or FINRA’s File-A-Tip portal, and talk to a trusted financial professional.
If it does feel off, look for information about the investment company. Search online, check to see if the firm is licensed and registered. Also, check the SEC’s EDGAR database. Many public companies file financial disclosures through the SEC’s EDGAR database, which can help investors verify information about publicly traded firms. Your state securities regulator may have information as well on an offer’s registration status.
There are a few things you can do to avoid these types of scams:
Verify that you really are talking with the investment professional, and not an impersonator. Look up the firm’s website independently (instead of just clicking on a link embedded in the email).
Go to investor.gov and look for the “Check out your investment professional” box and type in the name of the firm.
Don’t rely on contact information left in messaging forums or social media.
It’s also important to remember that not every bad investment is an outright scam, and just because it isn’t a scam doesn’t mean it’s a good investment. Some opportunities are perfectly legal and follow all the rules of disclosure but still carry a high level of risk that may not suit your taste. Regardless of the investment, asking clear questions, verifying information and claims, and getting a better understanding of the fundamentals behind the investment will help safeguard your strategy and make sure the investments you do choose are a good fit.
Smart investing is informed investing
When it comes to investing, a healthy dose of skepticism, along with careful research, can form the foundation of a solid strategy. Besides following a few common-sense guidelines, investors will often benefit from the advice of a certified professional or personal financial planner.