7 Signs an Investment Is a Scam

By Wendy Connick Markets Fool.com

Every investor is hoping to one day find that perfect investment -- the one that will produce massive returns and make you rich beyond your wildest dreams. Unfortunately, there are less-than-scrupulous people out there who will play into those fantasies by pitching you scams. If you're considering a new investment, be on the lookout for the warning signs below.

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It's "risk-free" or "guaranteed"

There is no such thing as a 100% risk-free investment. Even an investment as secure as, say, a bank savings account or a government bond could theoretically fail. And legitimate investment advisors will always clue you in to any potential risks. So if someone comes to you with a "risk-free" investment, it's time to start scanning the fine print.

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It's supposedly low-risk and high-return

It's an investing truism that the higher an investment's risk is, the higher its potential return. Consider bonds: U.S. government bonds offer relatively low returns because they are also extremely low-risk. Blue-chip corporate bonds are somewhat riskier than government bonds, so they offer a somewhat higher return. And so it continues all the way to junk bonds, which offer fairly high returns to compensate for their high risk. An investment that is purportedly both low-risk and high-return falls into the category of "too good to be true."

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It's available for a limited time only

Few, if any, legitimate investments are time-sensitive, but scammers love to make this claim. It makes the investment seem more desirable, and it doesn't allow you enough time to research the investment and confirm its legitimacy. The more urgently an investment advisor tries to get you to commit, the more important it is to do your homework -- both on the investment advisor and on the investment itself.

It's been purchased by a celebrity

Many ordinary people try to follow in the footsteps of successful investors and wealthy celebrities. Warren Buffett is famous for his brilliant investment choices, so if someone offers to sell you shares of a stock that Warren Buffett has purchased, you may naturally be interested. If Warren Buffett really has bought that stock, then it may indeed be a good investment -- but unless you check up on the seller's story, then for all you know, they could be making it up. And even if the story checks out, that doesn't meanyou should invest. An investment that's appropriate for a billionaire may not be right for your portfolio.

It was pitched at a free investment seminar

Ah, the free investment seminar. You're invited to have a free lunch along with several dozen other eager investors. Along with your food, you'll be served up a high-powered sales pitch disguised as "investment advice." Unfortunately, investment seminars are a favored platform of scammers looking for a venue to pitch shady investments. Investigations by the U.S. Securities and Exchange Commission (SEC) and the private Financial Industry Regulatory Authority (FINRA) have found that half of these seminars include misleading information, and around 15% come with a side of potential fraud. If you must attend an investment seminar, don't even think about buying into any investments on the spot. Go home and do plenty of research first, including asking one or more reputable financial advisors what they think of the investment.

It's priced at less than $5 per share

There is often little information available for "micro-cap" stocks and the companies that issue them, so it's easy for scammers to make up anything they want about them. These tiny companies are not required to file financial reports with the SEC, which leaves investors with little background information to confirm a seller's claims about the stock. And micro-cap stocks are typically among the most volatile of all stock investments, making them extremely risky. In certain cases, a micro-cap stock may be a good investment choice for you, but you'll need to do some serious research on the company before you decide. And if an investment advisor pushes a micro-cap stock and provides you with reports and other background information, check on that information yourself or get a second opinion from a reputable investment advisor before buying the stock.

It's recommended by an unlicensed advisor

Qualified investment advisors go through a long and stringent process to get certified by one or more agencies. However, there is no legal requirement for someone claiming to be a financial advisor to get any sort of certification or license at all. That means that if the financial advisor you're talking to is not certified, he or she could literally have no investment knowledge or experience. Find someone who has proven to have some qualifications by searching throughFINRA's BrokerCheck. And if they're not certified, walk away.

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