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Different types of investment fraud to watch out for

Investing can be a smart way to make money quickly and plan for your future financial security. However, depending on the kind of investment, it can be inherently risky as well. You may seek professional advice on how to invest your money.

Unfortunately, not everyone is trustworthy in the business world. You have probably heard of Ponzi schemes, but do you know that it is not the only type of investment fraud you may encounter? There are many ways financial predators may try to rob you of your money. This list from the U.S. Securities and Exchange Commission is a good place to start.

Advance fees

You are probably familiar with the phrase, "It takes money to make money," but be careful in applying this to your investments. Of course, professionals will charge for their services, but beware of advance fees. These are up-front payments you must make to receive a deal or recover losses. They may also hide under the guise of a tax, commission or expense you will receive back later.

Pump and dump

This fraud entails promotion of a business to pump up stock prices and then the fraudsters dumping their stock holdings into the market for investors to buy. After that, stock prices fall again, and investors lose money.

Pyramid schemes

Ponzi schemes fall under this category, in which no product or service exists, or not one that people outside the company are buying, and revenue comes from recruiting new investors. The pyramid inevitably collapses once it does not have enough low-level members to support the high returns. Multi-level marketing differs in that the focus is on selling a product or service. However, you should review this type too before becoming involved, as it is not automatically safer than a pyramid scheme.

Social media

While many legitimate businesses advertise on social media, the platforms also benefit fraudulent companies. Be extra cautious toward social media ads, double-checking with other resources to ensure an investment opportunity is legal.

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