Image: Colin Anderson
About This QuizAfter Bernie Madoff made off with more than $60 billion in fraudulent funds, investment scams received a lot of high-profile attention in the media. There is, however, a wide array of confidence schemes that financial shysters use to defraud starry-eyed investors. Take this quiz to find out if you can tell the difference between a solid investment and a shady risk.
Why are thinly traded stocks often used as tools in investment scams?
easily manipulated stock prices
Since they feature low trading volume, a small increase in the number of shares purchased can easily raise the stock price. Then the scammers can sell the stock and make a quick profit.
less likely to be noticed by regulators
few people know enough about them to realize they are overvalued
How much money do Americans lose to scams every year?
between $85 million and $125 million
billions of dollars
Scams come in many different sizes and types, but they mainly combine promises of wealth, guarantees of low risk, and an insistence on secrecy.
What is the defining feature of an affinity scam?
The perpetrators prey on people within a specific community or group.
People tend to trust those with whom they have something in common. Thus, people running affinity scams focus on hobbyist, religious or ethnic groups.
The scammer victimizes his or her relatives.
The victims don't even realize they have been scammed.
What product did Charles Ponzi sell in his investment scheme?
International Postal Reply Coupons
In early 20th century Boston, Ponzi scammed investors after finding a theoretical hole in the international postal system. His scam earned him $10 million.
U.S. Government Bonds
stock certificates of a small textile company
What is the defining feature of a Ponzi scheme?
paying investors dividends from the purchases of other investors
Named for the famous perpetrator of such a scam, Charles Ponzi, such schemes inevitably fail since they have no source of real profits.
selling shares in elite foreign banks
sales from unlicensed agents
What type of scam promotes investments in elite overseas financial institutions that don't actually exist?
prime bank scams
The lure of a prime bank scam is the belief that you can get in on an investment that only rich people could otherwise invest in. The only problem is that these "prime banks" don't actually exist.
promissory note scams
Why does the urgency and scarcity concept within a con work?
because people don't want to miss out on a money-making opportunity
In addition, the scammer benefits because if people invest on the spot, they will not have a chance to investigate the true value of the investment.
because the scam artist is more convincing when he speaks with urgency
because these emotional pleas make the investor overlook the obvious risks
What is a prospectus?
a document that outlines the details, risks and upside potential of an investment
A legitimate investment opportunities should have an official prospectus that clearly spells out the risks and potential reward of the investment.
an outline of the past returns on a specific investment
an investment opportunity that is more risky
What type of investment offers deserve extra caution?
If the investment opportunity is overseas, it may not have the same regulatory restrictions, and thus might be riper for manipulation.
high value stocks
investments in financial institutions, such as banks
Why should you be wary of a quick return on investment?
It may be a fake profit in order to encourage further investment.
Often scammers will pay out a small return quickly, to give you more confidence in your investment.
It may be a sign of higher taxes to come.
It may indicate that you are involved in a Ponzi scheme.