How to identify a potential financial scam

by | Jun 4, 2019 | General | 2 comments

losing money

What is a financial scam? Even if you are not familiar with this term, you have probably seen many of them, for example as ads when surfing on the Internet. They can assume many forms, but the underlying idea is that someone is offering you a sure way to get quickly a lot of money (note the keywords – sure, money, quickly). And even though this rings a bell saying “warning, too good to be true”, often people will fall for these scams. Likely result? Money is lost.

Why are these scams working? Often they leverage the emotions of people like fear of missing out and greed, and they use some advanced persuading techniques, for example, taken from Neuro-Linguistic Programming (NLP). In a previous article, I mentioned that NLP can be useful for trading and investing. Here you have another application: learn it so you will be better defended against these scams.

As mentioned above, the goal of a financial scam is to steal your money. However, this can be done in several ways. The most popular is probably the Ponzi scheme (or pyramidal scheme), where the money from new members is used to pay the older ones. This is like a pyramid where the basis sustains the top. Of course, the whole system falls when there is not enough support from new members. Another one sadly common in the financial world is the pump-and-dump. Here, the scammers buy a cheap stock. Then they suggest their members to massively buy the same stock in order to drive the price higher. Finally, the scammers will sell at a high price making a profit. Instead, the members will see the price of the stock crash due to the massive selling.


3 Ways to Identify the Scams


The question you may have now is: how to recognize scams? Even though each one is different, I want to list three common features that they often share.

  1. High-pressure tactics. Examples like “Only for the first 30 customers then the price will increase” or “join today to get a bonus of …”. Often these are also combined with NLP techniques.
  2. Lifestyle dream. Often the scammer will show you the lifestyle you can get when you buy the system he is selling. Not uncommon to see pictures with fancy houses and expensive cars (probably rented just to make the video/picture). Sometimes, to create more rapport, he will share his sad story, starting from a poor family to becoming so rich that you cannot imagine. And you can do the same. What are you waiting for? And best of it: when you enroll you can either pay the whole amount now or in 12 installments with 0% interests.
  3. Too good to be true. Crazy returns, tons of satisfied customers, virtually no risks. Something so good that one may wonder “why are you selling expensive courses if you can really get these returns that not even the best investors and traders in the world can achieve?”. Of course, they always have an explanation for this, as mentioned in a previous article. What they do not have, on the other hand, is a certified track record to support what they claim. This is so serious that even the Monetary Authority of Singapore wrote an article on how to identify an investment scam.


If it sounds too good to be true, it probably is