What is a scam and how can an investor protect himself from it

What is a scam and how can an investor protect himself from it — Photo 1

In this article we will tell you what scam is and what its most common types are. You will learn what methods scammers use to deceive you and steal your money. We will also share current expert information on how to protect your savings from fraud and scammers.

Scam: what is it

One of the worst dreams of any investor is to fall for a scam or “scam” (from the English “scam” — fraud).

Scam is the taking of funds without providing the proper level of financial services; transactions with inherent malice, market manipulation, breach of trust or conduct of inherently illegal transactions. The definition is not exhaustive, because there are many types of fraud and the line between direct immoral fraud and gray legal transactions with signs of fraud is very thin.

Types of scam

Let's look at some types of scam that scammers often use to steal other people's money.

Scam using initially false information

The most primitive scam is calls from “bank” employees who request personal or confidential information, requests to transfer money to an unknown account for any reason (prepayment of rent, gift tax, money for a ticket to a Nigerian prince, etc.). Even though it looks very naive from the outside, in fact, it is the most common type of scam, because often their target is elderly people, pensioners who are not familiar with technology (hence a certain amount of naivety), but have savings. This category of people is most often called by scammers who steal money by deception.

Financial scam

Often in this case, some kind of fictitious company or illiquid asset arises. This also includes financial pyramids. This type of scam often promises “mountains of gold”, without having the appropriate licenses, technologies or recruitment of personnel and know-how. Accordingly, by transferring money to the accounts of such scammers, you are simply giving money into the hands of scammers, and what is important, you often will not receive anything in return. Your money will then be used by scammers to hire lawyers against you in court, because the scam still needs to be proven.

Financial pyramids

We should also mention financial pyramids, also known as Ponzi schemes. One of the most famous cases of a Ponzi pyramid in the former USSR is the MMM pyramid. The scheme is very simple, but no less effective. Payments from old participants in the scheme are ensured by contributions from new participants. Thus, the scheme can exist for a very long period of time until there are no more new participants. From a certain point of view (albeit a very secretive one), one can define the financial system as a financial pyramid with new generations, as new participants who cannot help but participate in the pyramid.

Breach of obligations

This kind of scam is a typical situation with scam developers. For example, a developer who took investors’ money at the stage of digging a pit, took all the company’s money and went abroad, leaving people homeless and without money. A very relevant story for Kiev residents in the early 2010s.

Market manipulation

This is the most difficult type of scam. In Western European countries, market manipulation schemes are described in legislation and the actual application of the techniques that we will describe here is illegal. But in less developed markets, such as ours, and markets without regulations, such as cryptocurrency markets, these schemes are popular and are still practiced today.

Market manipulation includes:

  1. Pump and dump (from English “pump and dump” — pump it up and drop it) — a very popular scheme in our time on the crypto-asset market. When you see a “super secret channel for cryptocurrency signals”, which for some reason is advertised in the public domain, it is very likely that you have stumbled upon just such a scam. Its essence is that the organizers buy up a certain low-liquidity asset in advance for a certain time, and after that information is thrown into the “super secret channel for signals” that the “beads-coin” asset is about to fly “to the skies”. Participants in this channel begin to buy “coin beads ” and due to the initially low level of liquidity, the price of this asset begins to rise. After the price begins to rise strongly, the organizers of the scheme slowly sell their “coin beads” at a price higher than the one at which they bought. After this, the growth cycle can go on for some time without the participation of the organizers, new participants buy the asset from old participants, until the new participants run out and the price of the “coin beads” collapses to previous levels, and those who did not manage to sell “beads-coins” will find themselves in a situation where they bought a worthless asset at exorbitant prices.
  2. Rug pull (from English “rug pull” — pull out the carpet) is a common scam in the modern crypto market. In this case, the organizers of the scam are the issuers of the crypto asset. Without going into details of terminology, we will describe the fraud scheme in simple words. Cryptocurrencies have the ability to create a central liquidity provider — other more stable crypto assets are used to provide liquidity to the asset that is being traded. This ensures investor confidence in the currency and supports their ability to enter/exit that currency. In turn, the issuer of this asset, at the moment when the amount of this liquidity fund satisfies him, issues a crypto asset in his favor and buys out this entire fund for himself, leaving those who invested in this project with nothing.

Participants in the cryptocurrency markets know what a scam dump and dump and rag pool are. Within traditional financial markets, these schemes are usually not possible due to legislation against price manipulation in the asset market.

Not so much a scam as turning investing into a lottery are “exchanges” of contracts for difference and binary options. It is important that the ordinary investor does not understand the difference between the underlying asset (directly a share, bond, derivative) and a contract for difference in prices for this asset with another counterparty. In this case, the investor exposes himself to the risk of an unscrupulous counterparty who signed a contract for such a transaction and the risk of bankruptcy of this counterparty (an unacceptable risk for long-term investing).

Read also: What are bonds and how do they work

Signs of a scam

Scam is a real deception that has several main signs. You should be wary of the following features of the “project”:

  • urgency;
  • promise of big earnings;
  • lack of reputation;
  • safety assurance;
  • active manipulation and pressure on emotions.

When choosing a broker, investment fund or investment project, approach the issue carefully - your financial well-being depends on it.

Read also: How to find and choose a broker: professional tips for investors

How to protect yourself from scam: tips for investors

After you have learned what scam is, you need to think about ways to protect yourself from scammers. The first step to participate in a financial project should be to become familiar with the relevant legal framework. You must understand what you are investing your money in, if not thoroughly, then at a high level. If you do not understand the nuances, check with your contact person. If the contact person avoids answering, it is quite likely that this is not a financial professional — an expert will always answer questions, share specific sources from where you can learn more about a financial product.

Also, it is always worth checking the counterparty for licenses and whether they are included in the list of unreliable financial projects on the official website of the National Commission for Securities and Stock Markets:

  1. Investment companies with the appropriate license in Ukraine.
  2. Questionable financial projects.

Important: Always use your skepticism and ask questions. For scammers, your questions are an active danger and an obstacle on the way between them and your savings. For real financial professionals, it will not be difficult to answer and your caution will be met with understanding.

FC Daliz-Finance LLC has the ability to purchase military bonds on the secondary market and has experience in purchasing military bonds through primary dealers. In the first months of the war, our clients bought war bonds worth more than 500 million hryvnia. Join their number by leaving a request on our website.

Frequently asked questions: what is a scam on the stock exchange

What is the most common scam on the stock exchange

There is practically no scam on financial exchanges; there may be cases of a new method of market manipulation. But in our time, financial transactions on real exchanges with real financial assets are almost impossible.

What is the difference between scam and phishing

Scam scammers want to get your funds directly from you. With phishing, scammers obtain your information to use your funds to gain access to the information they can. sell/use to obtain funds from, for example, your employer. Accordingly, scam is the taking of your money, phishing is your data.

Будь-які питання, що у Вас виникнуть, 
Ви можете проговорити з нами.
Як з вами зв’язатись