Tuesday , 20 November 2018

8 Types Of Stock Fraud + How To Spot Scams & How To Avoid Them

Claims about guaranteed returns or “can’t miss” opportunities…[but] opportunities that are too good to be true must pass the smell test and, most of the time, if you do your homework, they fail with flying colors. Importantly, there are many different varieties of stock fraud to recognize, and they all have distinct characteristics that make them unique.

The original article has been edited here for length (…) and clarity ([ ])

Today’s infographic comes to us from StocksToTrade and it highlights stock fraud, which can be described as a violation of security law that occurs when a fraudster compels an investor to buy or sell based on false information.

Corporate Fraud
Using “dummy” corporations to create the illusion of representing a corporation with a similar name. Investors are then misled to buy shares in the dummy corporation, rather than the real thing.

Boiler Rooms
High-pressure selling technique used to peddle shares in speculative or fraudulent securities on the phone.

Pump and Dump
False and/or fraudulent information spread to increase the price of a thinly traded stock. When the stock hits a target price, the dumper sells to rake in substantial profits. Those left holding the stock are stuck and must sell at a loss.

Insider Trading
When a security is illegally traded based on material, non-public information.

Short and Distort
Similar to a pump and dump, this involves the spread of rumors or false information to profit from short-selling a stock.

Ponzi Scheme
A type of pyramid scheme where money from new investors provides the return for old investors.

Prime Bank
These are scams where fraudsters claim that funds will be used to buy bank instruments that don’t exist.

Accounting Fraud
Management intentionally manipulates accounting policies or estimates to improve financial statements. It could involve overstating revenues, understating expenses, overstating corporate assets, or understating existing liabilities.

The above potential scams be avoided if…

  • you take time to do your own independent research on any security you buy. If something seems like it is overly complex, rushed, or if important information seems to be omitted, there is likely a reason for this. In a similar vein, Warren Buffett wisely advocates that a business should be simple and easy to understand, or he won’t invest in it.
  • you research the salesperson touting the investment before making any decisions. Records from securities regulators are often one Google search away – and any disciplinary history should be known before proceeding with any transaction.
Related Article From the munKNEE Vault:

THE Book on Scams: What to Watch Out For & How to Protect Yourself 

If you want to stay on top of scams, this article will do just that like no other you have ever read. It is full of information on how to avoid being caught up in 12 of the most prevalent deceptive marketing practices (scams), such as false or misleading advertising, Internet scams and deceptive telemarketing or contests.

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