Investment Red Flag 1 year ago

As you may already know, people work and earn money for various reasons. They may save for early retirement, buy a house, prepare for an emergency, etc. 

These days, many people are already considering investing because of the idea of being their own boss, having a passive income stream, or simply diversifying their investment portfolio.

However, in 2020, ABS-CBN reported that starting the pandemic–scammers took advantage of the fact that people are confined to their homes and often target those who are susceptible to scams because of their difficult financial situations. 

There are many different types of fraudulent schemes, and every investment has risks, and the risk starts from those willing to exploit this motive to lure or deceive others. Here's how you can spot a red flag in an investment:

It sounds too good to be true.

When they start making claims of high returns with no risk–returns that are in any way higher than bond yields or the current interest rate of six percent (6%) to ten percent (10%) per year is probably a scam. 

Remember that success takes time, so if the rate is too high and/or it is guaranteed, you should already be worrying and ask more specific questions about their business practices.

False sense of urgency

You can spot a scam from a Pushy Salesperson who will pressure investors to make quick decisions. They will usually offer once-in-a-lifetime deals or limited offers that entice investors to invest immediately. But remember not to fall for these pressures because your money is at stake, so you better do your due diligence.

Lousy Branding and Marketing

This is not always the case. However, do know that, when business owners put up their business, they think of a good branding that will represent them in the long term. However, for scams--branding and marketing will waste their effort and money because the bottom line is to target vulnerable people and for them to disappear when the fraud is exposed. However, times have changed, and many scammers changed their approach to pose as legitimate businesses by offering free products, coaching seminars, etc. 

Here are common Investment Schemes:

Ponzi Schemes

This usually encourages or guarantees investors high rates of return with low risk. They will collect money from later investors and pay it to those earlier investors until there is no more money coming in or circulating because there are no more new investors.

Pyramid Scheme

In an attempt to establish credibility, this will usually encourage recruiting more members or investors and is also known as 'multi-level marketing.' However, unlike Ponzi schemes, returns are guaranteed the more you recruit new members, creating a pyramid of investors that will finance the scheme. 

Pump-and-Dump

Fraudsters or scammers will use false, deceptive, or wildly overstated claims to get the interest of investors and boost or 'pump' the price of a certain stock or investment. Then they will start selling or 'dump' their shares at a high price leaving many others to lose their investment or money.

Here you can read more about Different types of Fraud, and you may also read Legal Considerations when investing in a Business to avoid falling to fraud.

While here's what you should be asking yourself before investing:

1. Are they registered with the SEC or DTI?

Scammers these days could easily pose as a legit business by presenting a detailed business plan and even fabricated business licenses. But before investing money, make sure to do your due diligence and take the time to check if they are registered with the SEC or DTI.

2. Do they guarantee a high return?

Anything that sounds too good to be true should already ring a bell that it is a scam. But if you are convinced they are a legit business, you should at least consult a legal expert and evaluate if those returns are even possible. Keep in mind that investments involve risk, and it is impossible to guarantee or promise high returns, especially in a short period of time.

3. How do they guarantee? 

If someone comes to you and guarantees an easy and high return income, consider how they will issue those returns on investment. Is it secured by a property? 

Be mindful of your agreements and make sure to get everything in writing and check their business details and if they can even pay you back with the returns they promised. 

4. Is it equity or debt?

Two ways a company can raise funds are through equity and debt. If a company offers equity, it is selling a portion of its company and includes no corresponding commitment to pay back the money because you'll be getting shares instead. While "debt" refers to borrowing money from investors that must be repaid with interest and at a particular duration. It is important to understand this before investing to avoid expecting something in return.

5. What is their business model?

Warren Buffett always reminds investors, ' if you can't understand it, don't do it.' At least, only invest in a company where you understand the business model and how they operate because that will put you in a vulnerable position where you won't be able to get involved in the operation regardless of whether you're already losing money.

6. Are you the investor or the customer?

When investing in a company, it's important to understand where they source their products, their income, and your role in the business. Beware of the common investment scheme where they make people believe they are 'investors,' but the truth is, new members' investments are just used to pay those who came before them. 

Investing involves a great deal of risks, and as your interests and goals change, you can experiment with various strategies and learn as you go. When it comes to your hard-earned money, remember to be cautious. 

Just because everyone is investing in something doesn't mean you should, too. It is more important to assess the risk before getting into something. 

Let's take the word of the famous investor  

'Risk comes from not knowing what you're doing' - Warren Buffet

So make sure that before investing, you are aware of the risks associated with your investment. Perform your due diligence, and it's not bad to ask questions or seek legal advice when it comes to those things you don't understand.