What is an investment scam?
Investment scams can come in a variety of forms, ranging from fake investments in non-existent companies to Ponzi schemes and pyramid schemes. In most cases, scammers will try to take advantage of people who lack financial knowledge by offering get-rich-quick schemes that are too good to be true. Victims of investment scams are often promised high returns with minimal risk.
Types of investment scams
There are many types of investment scams, including the following:
- Pyramid schemes
Pyramid schemes are illegal investment scams that involve recruiting people to invest and then using their money to pay existing investors. These schemes often rely on a network of people to spread the word and attract new investors.
- Ponzi schemes
These are investment scams that promise high returns but instead use money from new investors to pay existing investors. Ponzi schemes often use high-pressure sales tactics to get people to invest.
- Pump-and-dump
Scammers encourage investors to buy shares in little-known cryptocurrency companies based on false information. The share value rises and the fraudster sells their own shares, making a tidy profit and leaving the victim with worthless stocks or coins.
- Advance fee fraud
Advanced fee or 419 scams are very creative. You are promised a large sum of money, but you have to pay upfront. Once you have
made the payment, fraudsters either disappear with your money or try to get you to make more payments.
- Job Scam
Scammers advertise jobs the same way honest employers do – online (in ads, on job sites, and on social media), in newspapers, and sometimes on TV and radio. They promise you a job but want your money and personal information.
- Truck scam
Trucking scams are quite common in South Africa and reappear every few years. In most of these cases, people are asked to invest a lump sum in an asset such as a truck, or even to purchase minerals such as coal. They are then told that there is either a guaranteed contract in place to hire out that truck with huge returns, or an opportunity to sell a mineral at a large profit.
How to protect yourself from investment scams
Investment scams can be difficult to detect, as they are often designed to look legitimate. In order to protect yourself from these scams, there are a few key steps you can take:
Be wary of any investment opportunity that promises an unusually high return rate.
If something seems too good to be true, it probably is. When researching a potential investment opportunity, look into the company, and read its reviews. In South Africa, if the platform is legitimate, it should be licensed by the Financial Services Conduct Authority (FSCA) and display its FSP number on all marketing material. International platforms have similar standards in accordance with the jurisdiction in which they operate.
Always ask questions
Ask about the company’s track record, how the investment works, and if there is any risk involved. If the person offering the opportunity is evasive or doesn’t provide complete answers, you should be wary.
Never invest without research
Be sure to read the prospectus and other documents thoroughly. If you don’t understand something, ask for clarification.
Be wary of any investment that requires you to part with large sums of money quickly or share sensitive personal information
Scammers often create urgency to rush people into decisions.
Trust your instincts
If something doesn’t feel right, it probably isn’t. If you're unsure, it’s advisable to err on the side of caution and avoid investing.
Be safe!
As a rule, delete any communications, whether emails or SMS messages, from unknown senders immediately to avoid falling into a fraudster’s trap. You should also contact your bank immediately if you happen to fall victim to a fraud scheme.