Red Flags and Identifying Scams

Certain scams are easy to identify from the beginning – to the point that even the most naive investor can spot them. However, scammers are becoming increasingly complex over time, making some schemes difficult for even the most experienced traders to sound out. Thankfully, there is a set of principles that anyone can follow to help them avoid becoming victims of an investment scam, no matter how well-disguised. 

Red flags to watch out for 

• Promises of great returns. Nearly every form of scam will offer lucrative, guaranteed returns without much work required on the victim’s part. The phrase “too good to be true” holds up here. By simply asking themselves “Is this too good to be true?”, investors can avoid the majority of scams.  

• “Risk-free” investment opportunities. There’s no such thing as a risk-free investment – even high-interest savings accounts with reputable banks pose some risk. Therefore, any opportunity that claims to guarantee returns without risk is likely lying and best avoided.  

• Pressure to invest right now. A common tactic of investment scams is to pretend the “opportunity” is dwindling, and if the victim does not act fast they will miss out. This is an attempt to invoke a fear of missing out (FOMO) and manipulate investors into falling victim to a fraudulent investment. 

• Cold contact. Investment companies or individuals that contact you without any prior communication are often considered a red flag. Occasionally, unsolicited messages/calls can be legitimate, but it’s best to remain wary of such offers – especially if they are paired with other problematic claims. 

• Strange payment methods. If an investor requests payment through any form of direct, anonymous gateway – think Western Union, gift cards or Bitcoin/crypto – this can be cause for concern. Most legitimate investment platforms require deposits from a verified bank account. 

• Unofficial applications. Some investment scams will ask their victims to download a mobile application that isn’t from the iOS or Google Play store (for example, directly installing a .apk). Similarly, for desktop users, avoid using executable (.exe) files as much as possible. 

• Romantic partners. Online-only romantic partners can raise red flags for several reasons. However, be particularly careful if a supposed partner starts becoming interested in personal financial details. 

Identifying scams

Keeping an eye out for the main “red flags” can help investors easily identify the most common investment scams. Any opportunity that raises more than one of these red flags should almost always be avoided. Recognising unrealistic offers is another great way to separate legitimate investments from scams. No reputable investment platform will ever suggest their products provide a guaranteed return, making this a simple way to identify potentially fraudulent exchanges or brokers. 

Although the most prolific scammers have become very good at hiding their tracks, the more amateurish fraudsters often leave a digital trail behind them. Simply googling the name of a company or individual (or email address) offering an investment can drag up results, pointing toward them being a scammer.   

Keeping an eye on how an entity communicates – personally or to a broader audience – can go a long way to identifying investment scams. Regulated and legitimate financial products are legally obligated to maintain clear and consistent communication with their investors and customers. So, if an individual or company is vague or misleading in its messaging, there’s a good chance it’s a scam.  

Always perform independent due diligence on any investment opportunity before parting with money. Don’t trust what others tell you without first verifying the information from multiple sources. By remaining vigilant for red flags and conducting ample research, investors can enjoy a healthy internet without much risk of being scammed.