How do I Recognize a Financial Scam?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 January 2020
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A financial scam is a fraudulent operation that involves loans or investments. As history has shown, celebrities, successful businessmen, famous entrepreneurs, and regular investors all have the potential to be drawn into a financial scam. Learning basic tricks to help identify a financial scam can help avoid obvious cons, but it is important to remain vigilant: fraudsters are nothing if not tenacious, and the scams of tomorrow will likely be crafted specifically to trick those who understand the scams of today.

The first and perhaps most obvious sign of a financial scam is that it sounds too good to be true. Ponzi schemes, or those where initial investors are paid dividends not by how the investment performs but by the money taken from new investors, often show their teeth by promising consistent, high returns. All investments fluctuate, meaning that the return level of any real investing scheme will naturally go up and down over time. If an investing plan shows ten straight quarters of consistent returns, it may be a sign of a scam.


The words “risk free” should set off alarm bells in any investors head. With the occasional exception of some government-issued bonds, no investment is considered to be completely risk free. If a company swears, insists, and guarantees that there is absolutely no way to lose money, be wary. Most scams succeed because they convince investors that the scam has beaten the market; it can take a very level head to remember that market fluctuation is not actually beatable, and that anyone guaranteeing success is most likely incredibly naive or a scammer in disguise.

Take some precautions before agreeing to invest in any type of financial scheme. Look up the business on review websites or through reputable business bureaus to get a sense of their history and reputation. If the business lists a local address, visit the location to make sure it is a real headquarters and not simply an address tacked on to give an air of legitimacy. Though these measures cannot rule out the possibility of a financial scam, they can help weed out the more obvious culprits.

Learning about the different types of financial scam will help make warning signs loud and clear on a potential investment. Many banks and governments maintain websites that detail the most popular types of scams. These websites can be a good place to check if an offer to invest seems the least bit fishy; some may even include records of currently circulating scams that should be avoided.



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