What is a Forex Scam?

A forex scam is an attempt by a dishonest individual or company to defraud investors out of money invested in the foreign exchange market. Investors in the foreign exchange market, also known as the forex market, are susceptible to such scams because of the lack of a centralized exchange to oversee the market. The typical forex scam promises great monetary gains to an investor from a lump-sum initial investment. Some typical scams include rapidly-traded accounts to produce high commissions, forex software that promises gigantic returns on investment, and outright false advertising and fraud.

The foreign exchange market, which is one of the most heavily-traded and volatile markets, relies on the exchange of currencies from different countries, which have different values and interest rates attached to them. This market is a so-called over-the-counter market, meaning that there is no centralized body, such as a stock exchange, recording all of the transactions made. As such, investors can be vulnerable to unscrupulous people and companies attempting to defraud them. Investors should be aware of the possibility of a forex scam before proceeding with any investments.

There is a limited amount of currency in the world, and because of this, the forex market is known as a zero-sum game. Simply put, that means that when one investor gains money, another loses it. Since the market makers, such as the large banks and investment companies, have great amounts of capital, there is great risk for the everyday investor of losing their capital long before those institutions do. Anytime that a promise is made that there is no risk involved in a forex investment, then chances are good that a forex scam in the works.

These scams can take many forms. Often, it is simply a case of a retail forex broker or website promising investment returns that they simply can't deliver. After all, since the forex market has as many winners as losers, it's unrealistic for any company to promise every investor a positive return. Websites promoting infallible trading software are likely stretching the truth.

Investment firms usually receive commissions for every trade they make on a customer's account, so churning through trades to increase these commissions is another example of a forex scam. In addition, investors should be wary of retail brokers that allow them to take an extremely large position in the forex market without any capital to initially back it up. Such investors are said to be highly leveraged, and they run the risk of being asked to suddenly fork up money for any losses. If the broker is perpetrating a forex scam, the losses for the investor in this situation could potentially be huge.