Online trading scams are a most specious type of fraud, combining the safety of online anonymity with the high personal importance of your investments. Imagine your 401(k) disappearing in a second because a shifty online presence claimed it could offer you enticing returns on investment. Here are a few examples of online stock trading scams so you can keep yourself out of hawk from financial fraud.
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Fraudulent Pre-IPO Investing
In this type of online trading scam, an investor buys a stake in a company before its initial public offering (IPO) of securities. There is a high level of risk in any pre-IPO investment, but an investor can face several pitfalls in this situation. First, the offering may be illegitimate. Any company that wants to sell securities to the public must file the transaction with the SEC or qualify for an exemption. If this has not happened, you could lose your total investment. Second, the company may never actually go public. Fraudsters may use the IPO's hype to lure investors and gain money without going public.
The best way to avoid this type of online trading scam is similar to other scams: investigate. Knowing more about the company will give you better insight as to whether the offer is legitimate or fraudulent. Research the company. What services or products does it provide? Can you access the company's financials? Review the management team. A history of SEC investigations and unhappy investors is a bad sign. Take the time to do the homework and you'll find yourself in a safer position.
A good, old-fashioned Ponzi scheme is easier to pull off online these days, making it a common and lucrative online trading scam. A classic Ponzi scheme goes like this: An advertisement is placed that proclaims a "high-yield investment program" where investors buy stakes in a scheme that takes advantage of their lack of investing experience and knowledge. When the initial investment plus returns is dispersed, the investors are likely to reinvest. The returns, however, are actually the initial investments paid by new entrants, not profits made from real investments. Online, anonymity protects Ponzi-scheme promoters, making it easy for them to disappear when the scheme ends.
This type of online trading scam preys on investor ignorance. Investors are lured by promises of high returns that appear real, and tricky transfers to new schemes give the illusion that the account is solvent. Keep out of this kind of scam by investigating the promoter. Find out if the investment is registered with the SEC. Arm yourself with knowledge about this type of scams. Remember, if it sounds too good to be true, it probably is.
Pump and Dump Schemes
This type of online trading scam leads to overvalued stocks from misleading statements and promises of insider tips. In a pump and dump scheme, a promoter issues a call for investors to buy a stock because the promoter knows something special about the company (the pump). Then, as investors buy into a stock and inflate the price, the fraudsters cash out on their original shares (the dump). This type of scam is commonly seen on the internet, where message boards can catch fire with promises of fast returns and insider info. When the fraudsters dump their stocks, the average investors lose their money as the stock devalues quickly.
As with any other online trading scam, remain skeptical. Don't buy into an investment too rashly, and take standard analysis like company profiles and financial statements into account. Investigate the promoter. What does he have to gain from your investment? Verify claims independently; don't rely on one source.
If you believe you've stumbled upon an online trading scam, don't invest. Take a moment to view the fund or investment from all angles and determine whether you've found a legitimate venture. Check credentials and research sources. The best way to avoid an online trading scam is to be knowledgeable.
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Disclaimer: We provide this information as an analysis of the most up-to-date sources, but we do not attempt to interpret SEC regulations. If you need any clarifications on any of the laws or rules presented in this article, it's best to notify an attorney who specializes in securities law.