When you’re first starting out in trading there’s a great deal to do just to find your feet, never mind protecting yourself from scams as well. Unfortunately, scammers recognize this vulnerability and new traders are often a favourit target. It’s important to know what to look out for, to be able to identify common types of scam and to be alert to warning signs. This guide is here to help.
Stock and share scams
Because stocks and shares still account for the bulk of money traded, it’s in this area that most scams are centered. Among the most common are pre-IPO offers, in which a seller offers stock in a company which has yet to go public. Even if this offer is legitimate – which it is usually not – if the transaction isn’t filed with the SEC, you risk losing your money and gaining nothing. Then there are pump and dump schemes, in which sellers talk up a particular stock well beyond its real worth, creating a false sense of its value. Once the price has risen due to a lot of people buying, they sell their own shares at that inflated price and disappear – and the price collapses again, leaving you with a loss.
The other big scam in this area is the pyramid scheme (one type of which is more famous as a Ponzi scheme), in which you’re sold stock that you’re assured is great value and, because you start to receive good dividends, you invest in more. The problem is that those dividends aren’t real – they’re financed from the money paid in by the next set of buyers, with the scammer creaming a nice profit off the top. Once people stop buying into the scheme, what you’ve bought is worthless. What’s more, if …