Thinking About Investing on Your Own? Be Wary of These 5 Traps for Unsophisticated Investors

By: Jacob Zamansky Investments 1 Follower


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If you are new to investing, learning the basics is the first step toward limiting your risk and making sound investment decisions. While this means making sure you understand the securities in which you invest, it also means making sure you can trust your brokerage firm or investment advisor.

Unfortunately, investment fraud is a serious issue for individual investors. Investment scams often target unsophisticated investors, and unscrupulous brokers and advisors know that new investors are less likely to understand what losses are (and aren’t) the result of market factors. So, before you invest, gather the information you need to protect yourself, starting with these warning signs for investment fraud:

1. Unsuitable Investment Advice

When you work with a broker or investment advisor, your chosen investment professional should recommend investments that are suitable to your personal financial condition and risk preferences. If you are being solicited by a broker who does not know your investment profile, or if your investment advisor is offering investments you do not understand, you should be very cautious about deciding to invest.

2. Frequent Trading on Your Account

In the investment world, frequent trading on an investor’s account is known as “churning.” By churning investors’ accounts, brokers and investment advisors can rack up commissions – and they typically do so at their clients’ expense. As a recent example, the Financial Industry Regulatory Authority (FINRA) barred a broker who collected over $200,000 in commissions while generating $175,000 in losses for his client.

3. “Can’t Miss” Investment Opportunities

While investment opportunities come and go, there is no such thing as a “can’t miss” opportunity. The reality is that all investments carry risk, and no broker or investment advisor can guarantee that an investment will generate a certain amount of return, or even any return at all. If you are being pressured to invest quickly – particularly if you cannot seem to obtain detailed information about the investment – can be a red flag for a fraudulent scam that is targeting inexperienced investors.

4. Investment Offers Targeting Your Affiliation with a Particular Group

From religious groups to senior citizens, “affinity fraud” schemes target new investors who are members of particular organizations and segments of the community. These schemes seek to take advantage of members’ trust in order to gain access to their investment accounts, and in many cases their life savings.

5. An Unregistered Securities Broker or Investment Advisor

All securities brokers should be registered with FINRA, and all investment advisors should be registered with the Securities and Exchange Commission (SEC). If your broker or advisor does not appear to be registered, this could be a sign that he or she is engaging in investment fraud.

Author Bio

Jacob Zamansky

Investment fraud attorney, Jake Zamansky, has extensive experience representing clients who have suffered substantial financial losses from stock broker fraud, negligence or misconduct by issuers of securities. Our law firm litigates in two venues: FINRA arbitration and federal and state court class action. We represent individual and institutional investors.

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