Discuss each of the following rules with your students.
Remember That Investing Involves Risk: There is no such thing as a completely “safe” investment because you always stand a chance of losing your money regardless of where you invest it. It is important to remind students that some investments are safer than others. (For an overview of investment risk, see the Financial Planning Pyramid poster and teaching guidelines.)
Investigate Before You Invest: The riskiest investments are those where you have little or no information. There are many resources such as magazines, newspapers, websites, and television programs that provide information about investments. You should also request written information such as a prospectus or a financial statement for potential investments. Remember, take the time to examine your investment
options before you invest.
Call Your State’s Securities Regulator: Find out if those who promote investments are legitimate. The state securities regulator licenses individuals who want to provide investment advice. They can tell you if the individual you are dealing with follows the
rules. If an individual is not registered, find out why.
Don’t be Pressured into a Quick Investment Decision: If you make a quick decision about an investment opportunity, you may suffer because you have not gathered all the necessary information. Con artists use pressure tactics and phrases such as “this offer is good today only” or “act now before this opportunity passes you by” to get you to commit your money without knowing all the facts. They also use strong emotions such as greed or fear to get you to make a quick decision. Take your time; it is better
to lose the opportunity than to lose your money.
Be Cautious When Investing Your Money in Response to Unsolicited Offers: Exercise patience when you’re presented with an investment opportunity. Ask for a prospectus or a financial statement about the investment opportunity being offered. Talk to a friend, relative, or financial advisor before you respond to a cold call. Consider how your investment decision may affect you and your family.
Beware of Fantastic Promises of Easy Profits: If it sounds too good to be true, it probably is! Remember the relationship between return and risk — higher potential returns come with higher risk. If someone is offering you an investment that guarantees high returns and no risk, ask questions!
Con Artists, Swindlers, and Scammers
Regardless of what they are called, these individuals often present themselves and their “opportunities” as honest, legitimate, and safe. Many are polished and come across as well spoken and polite. There are several types of investment frauds that are commonly used in different forms. It is important for students to recognize the characteristics of each in order to avoid becoming the victim of one.
Discuss these types of investment scams with your students.
Pyramid Schemes: This scheme promises huge returns to investors that buy into the program. In order to recoup their initial investment and obtain the returns, the investor has to recruit new investors to the program. This type of fraud initially succeeds because early investors are paid off, but eventually the pyramid will collapse because there simply are not enough people in the world to keep it going.
Ponzi Schemes: A Ponzi scheme is a type of pyramid scheme named for Charles Ponzi. In the 1920s, Ponzi created a scam to dupe investors by promising returns of 40% in three months. He told investors that he could buy international mail coupons overseas for pennies and then resell them in the U.S. for dollars. He claimed investors would make money by taking advantage of the differences in U.S. and foreign currencies. Ponzi was a terrific salesman. In one three-hour period, he brought in one million dollars! The scam was made to look legitimate early on because Ponzi used the “rob Peter to pay Paul” principle, paying off a few of the early investors with money he received from new investors. Ponzi’s scheme was doomed to fail because he only ever purchased $30 worth of coupons.
Pump and Dump: The promoters of these schemes create a buying frenzy for micro-cap (companies with little value) or non-existent companies through the release of false or misleading statements. Once the stock price rises in value, the promoters stop touting the stock and sell their shares, and the misled investors are left with shares of near worthless stock.
Affinity Fraud: Con artists who commit affinity fraud take advantage of the trust people have in individuals like themselves. Swindlers often target the elderly, ethnic groups, or religious groups. These swindlers may also exploit the trust of group members by first conning a prominent or well-respected member of the group.
Internet Fraud: The internet provides a wealth of information about investments. Some information comes from reputable firms. Unfortunately, it is also very easy for someone to set up a slick website that looks remarkably like a legitimate investment site. Con artists also use spam e-mail to send a message to thousands of potential investors inviting them to take advantage of “no risk opportunities.” Technology allows spammers to personalize their message to make it seem as though they have already developed a relationship with you. Internet scams usually take the form of one of the aforementioned scams.
