It is arguably true that yielding high returns is one of the primary aims of investing. Both beginners and experienced traders are at risk of broker fraud. Novice traders are the main targets for scammers. At the end of this article, you will have a better understanding of surprising brokerage fraud to watch out for.
What Are the Types of Brokerage Fraud Schemes?
1. Pyramid and Ponzi Schemes
This is one of the most popular broker fraud forms that novice investors should watch out for. At first, a pyramid scheme appears to be promising, but in the long run, the scheme will collapse. Let’s catch a glimpse of how these schemes operate.
Pyramid schemes seem legit to the first participating individuals to lure others to join. The first people to invest in these schemes are normally paid in commission to bring others on board. You are upgraded to the next level if you invite many people, but in the long run, the scheme will collapse, and you will lose your investment.
Ponzi is also another form of a pyramid scheme, which was named after Charles Ponzi. Charles was an Italian who traveled to the United States, and he generated over 20 million dollars back in the 1920s. This is a glimpse of how the Ponzi scheme works: in the first month, you will be encouraged to bring two more individuals into the investment; in the second month, you will be required to bring four more individuals to join the scam, and so forth.
The Bernie Madoff investment scheme was one of the largest Ponzi schemes in which the investors were scammed over 65 billion dollars. It is highly advisable never to invest in such schemes.
2. Pump-and-Dump Schemes
This is another brokerage scheme that is renowned. These investment schemes usually take two forms.
First, the scammers usually buy shares in a liquid firm or company before bringing traders on board. The scammer usually acts as a shares broker where he convinces other potential investors or traders to purchase the shares then escalate the price. After the escalation of the shares, the ”broker” will dump them for a huge profit. From that point, the shares will tremendously lose their value.
The other form of this scheme is where traders join their efforts to purchase shares in huge volumes then escalate their price. They will then enhance hype in the stock before dumping. RCA was a famous pump-and-dump scheme in the 1920s.
3. Boiler Rooms
Scammers usually create offices known as broiler rooms, where they create some risky schemes. The scammers can even put up a website to make the brokerage company sound legit. It’s worth noting that broiler rooms are usually temporary, and they do urge their clients to invest in their schemes. The funds are normally used to purchase useless stock.
The operators will get some commission when the stock is purchased, and sometimes no stock is usually purchased. The company will later relocate or even shut down their offices. Broiler rooms aren’t that common, but you must watch out to avoid falling into the trap.
Other Ways to Detect Brokerage Fraud Schemes
- High-profit claims at low risk
- Zero or little risk warnings
- Flaunting lifestyle mainly associated with jets, houses, and expensive vehicles
- Virtual offices
- Bellicose sale tactics
- Suspicious management
- Faulty sales documents
- Pressuring you to sign up
Verify Before Investing
The above are some of the brokerage schemes that you should be aware of. It is highly advisable to thoroughly research the investment you want to get into. Always ensure the investment firm has legit documents that can be verified. You can also ask a few people about that particular investment opportunity that you want to get into.