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This article is about scams and how they relate to investing in general.

Investment scams

Some things aren’t what they seem

As with all walks of life, there are plenty of investment fraudsters and con artists out there. Their rip-offs will offer fantastic ‘investments’ that are nothing of the sort.

The good news is that the UK has strict financial rules and regulations. This means scams are usually avoided if you stick with regulated financial service providers. These companies are scrutinised by the City’s watchdog, the Financial Conduct Authority (FCA). But the FCA can’t police everything all the time, so protection is by no means guaranteed. 

Outright criminal scams range from being sold fake share certificates through to pyramid and Ponzi schemes.

Infamous scams

Charles Ponzi became notorious during the 1920s for exploiting a particular type of investment scam that subsequently adopted his name. Instead of generating genuine profit, the scheme pays out returns using fresh cash rolling in from new investors.

When financial markets crashed in 2008, it was found that a $64bn hedge fund run by Wall Street financier Bernie Madoff was a Ponzi scheme.

He wasn’t the only one. Allen Stanford also committed a multi-billion dollar Ponzi fraud. As with Madoff, he wound up in jail – but not before arranging a 20/20 cricket tournament between England and a West Indies all-star XI with a $20m prize of ill-gotten gains.

Everyday reality

These high-profile cases hit the headlines, but more routine fraud takes place every day.

For example, if you get cold-called by a firm offering to sell you shares, it could be a boiler room scam, where they take your money in return for worthless shares. And you have probably already encountered ‘phishing’ emails, some of which invite you to visit a cloned website masquerading as a legitimate service.

This can all start to sound rather scary, but if you use your head and follow advice provided by the FCA you are much less likely to fall victim to scams.

But do also remember that avoiding fraud doesn’t mean you’re always guaranteed to get your money back.

Let’s say you invested all you had into Woolworths at the start of 2008. Within a year this well-known high street retailer had gone out of business, leaving you with shares worth little or nothing. You lost money just as surely as if you were robbed. But you weren’t robbed. You just made a particularly unlucky or poor investment decision.

Don't get caught out

Millions of people fall victim to scams every year, from experienced investors to people dealing with a large sum of money for the first time. The FCA’s ScamSmart website gives consumers tips on how to protect themselves from investment fraud, and hosts the FCA Warning List. The Warning List is an online tool that warns users of the risks associated with an investment and helps them to check a list of firms the FCA knows are operating without its authorisation.

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