October 1, 2024 • 6 min
Article Contents
Of all the scams running, investment scams hit people’s bank accounts the hardest, with a median loss of $7,700.
And they’re on the rise. In 2023, Americans lost more than $4.6 billion to investment fraud. That’s nearly double the amount lost just two years earlier.
Nearly anyone can become a victim of investment fraud. We often hear about investment scams targeting older Americans, and those are certainly common. But millennials — people now in their 30s and 40s — are the age group most likely to lose money to investment scams. Scammers have tricked people from all backgrounds, including those with an advanced education or solid business experience.
Investment scammers trick you into investing in stocks, real estate or some other opportunity. Then they disappear with your money.
Investment fraudsters lure people in with exciting promises. They claim that if you invest in their money-making “opportunity,” you can get rich quick with little risk — or none at all.
They might use flashy social media posts or online ads to win you over. Some send a text or email promising to help grow your wealth quickly. And they can be clever. A scammer might pose as a trusted investment advisor in your community, for example, then direct you to a fake website.
They might even have testimonials from (fake) customers who invested and are now living the good life — perhaps traveling the world or enjoying early retirement in a mansion with a sports car in the driveway.
An opportunity like that is hard to pass up. But once you hand over your money, things go downhill. Investment scammers might make small payments to you at the start, so you’ll invest even more. But soon enough, they stop communicating, close the accounts and disappear — taking your money with them.
Investment fraudsters use various methods to reel people in. These are some of the most common.
Ponzi schemes
Ponzi schemes often involve selling an investment in something that’s getting lots of buzz, like a new technology. But it’s all a lie.
They don’t actually invest in anything. Instead, they simply shuffle investors’ money around. They take money from new investors to pay their existing investors. Why? To trick those existing investors into believing that they’re earning a return on their investment.
Here’s the problem: To keep the money flowing in, the fraudster needs to constantly recruit new layers of investors — and make sure that existing investors stay in the game. Otherwise, there won’t be enough money to pay “returns” and the whole scheme collapses.
Pyramid schemes
A pyramid scheme works much like a Ponzi scheme, with one big difference. The scammers tell investors upfront that they (the investors) will need to recruit other investors. It might seem more honest than a Ponzi scheme, but the result is usually the same. It eventually becomes difficult to find new investors, and the scheme crumbles.
You may have heard about multi-level marketing companies, which may (or may not) be pyramid schemes. These companies hire salespeople to both sell a product and recruit new salespeople. Some multi-level marketing companies have been around for a long time because they sell a useful product or service, while others are running pyramid schemes.
High-return investment opportunities
If someone offers you an investment that promises high returns with little to no risk, it might sound too good to be true. And it probably is. Such bold claims are usually a tip-off of fraud.
High-return investment offerings, even the rare times they are valid, are also usually “non-registered,” meaning they aren’t registered with the federal government. So, if you invest, you won’t get the benefits of a registered investment – like income tax deductions, tax sheltering or tax-free capital gains.
Pump-and-dump schemes
In this scheme, fraudsters buy lots of shares of a company’s stock. Then they post on social media or email thousands of people, inviting them to buy the stock too.
The scammers create buzz and “pump” up the stock. They make exaggerated claims – or tell outright lies – to generate excitement. They may claim to have secret “insider” information about the stock, saying it’s about to blast off. And they usually pressure would-be investors to act quickly so they don’t miss out on a golden opportunity.
So people invest in the stock. This causes the scammer’s own shares to gain value, which was their goal. Now it’s time to “dump” the stock. The fraudsters sell their (now valuable) shares and make lots of money. But selling so many shares at once causes the stock price to drop quickly, leaving their victims with shares that aren’t worth much. Pump-and-dump schemes aren’t just unethical. They’re also illegal.
Cryptocurrency scams
Cryptocurrency, unlike US currency, is a type of money that only exists digitally. Bitcoin and Ether are popular digital currencies, although new ones are being created all the time. People invest in crypto because the value of a specific cryptocurrency can rise (or fall), based on factors such as supply and demand.
In the midst of the crypto craze, crypto investment scams are rampant. Crypto fraudsters might contact you on social media, perhaps via direct message, claiming to have made millions investing in crypto. Then they send you to a fake app or website to buy cryptocurrency. You’ll enter sensitive information like the password to your crypto wallet, and at first, everything seems just fine. As you track your crypto, you’re thrilled to see it gain value. But it’s a ruse that prompts you to buy more. Then, when you decide to withdraw your money, your request is declined, or the site shuts down.
Some crypto-scammers run pump-and-dump schemes. They persuade investors to buy a specific cryptocurrency so they can inflate the value of their own crypto, then sell their (substantial) holdings, causing the value of the crypto to crash.
Real estate investment scams
There are various types of real estate investment schemes. Some scammers convince you to invest in real estate — perhaps a luxury housing development — that gets stalled month after month, or never gets built at all.
Others may invite you to a seminar on flipping homes to build wealth. Guest speakers share their success stories and excitement fills the room. Then they convince you to attend a multi-day seminar to learn more, charging you thousands of dollars for information that’s available elsewhere for free.
Here are some common signs of an investment scam:
When someone comes across as friendly or trustworthy, we’re more likely to buy what they’re selling — and scammers know this. So don’t let a salesperson’s charisma cloud your judgment.
If you’re the victim of investment fraud — or someone contacts you about a suspicious investment — report it to the Federal Trade Commission and the Securities and Exchange Commission.
If the scammer contacted you online or sent you to a website, report it to the FBI’s Internet Crime Complaint Center, which helps the agency bring the scammers to justice.
To report a cryptocurrency investment scam, contact the Commodity Futures Trading Commission.
If the fraudster reached out to you on social media, you should also report it to the social media platform.
This article was created in accordance with the Patelco editorial policy.
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