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How to Spot a Forex Scam
The spot forex market trades over $5 trillion a day, including currency options and futures contracts. With this enormous amount of money floating around in an unregulated spot market that trades instantly, over the counter, with no accountability, forex scams offer unscrupulous operators the lure of earning fortunes in limited amounts of time. While many once-popular scams have ceased—thanks to serious enforcement actions by the Commodity Futures Trading Commission (CFTC) and the 1982 formation of the self-regulatory National Futures Association (NFA)—some old scams linger, and new ones keep popping up.
Back in the Day: The Point-Spread Scam
An old point-spread forex scam was based on computer manipulation of bid-ask spreads. The point spread between the bid and ask basically reflects the commission of a back-and-forth transaction processed through a broker. These spreads typically differ between currency pairs. The scam occurs when those point spreads differ widely among brokers.
- Many scams in the forex market are no longer as pervasive due to tighter regulations, but some problems still exist.
- One shady practice is when forex brokers offer wide bid-ask spreads on certain currency pairs, making it more difficult to earn profits on trades.
- Be careful of any offshore, unregulated broker.
- Individuals and companies that market systems—like signal sellers or robot trading—sometimes sell products that are not tested and do not yield profitable results.
- If the forex broker is commingling funds or limiting customer withdrawals, it could be an indicator that something fishy is going on.
For instance, some brokers do not offer the normal two-point to three-point spread in the EUR/USD but spreads of seven pips or more. (A pip is the smallest price move that a given exchange rate makes based on market convention. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) Factor in four or more additional pips on every trade, and any potential gains resulting from a good trade can be eaten away by commissions, depending on how the forex broker structures their fees for trading.
This scam has quieted down over the last 10 years, but be careful of any offshore retail brokers that are not regulated by the CFTC, NFA, or their nation of origin. These tendencies still exist, and it’s quite easy for firms to pack up and disappear with the money when confronted with actions. Many saw a jail cell for these computer manipulations. But the majority of violators have historically been United States-based companies, not the offshore ones.
The Signal-Seller Scam
A popular modern-day scam is the signal seller. Signal sellers are retail firms, pooled asset managers, managed account companies, or individual traders that offer a system—for a daily, weekly, or monthly fee—that claims to identify favorable times to buy or sell a currency pair based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities, plus testimonials from people who vouch for how great a trader and friend the person is, and the vast wealth that this person has earned for them. All the unsuspecting trader has to do is hand over X amount of dollars for the privilege of trade recommendations.
Many of signal-seller scammers simply collect money from a certain number of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. This new scam is slowly becoming a wider problem. Although there are signal sellers who are honest and perform trade functions as intended, it pays to be skeptical.
“Robot” Scamming in Today’s Market
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These scammers tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot” because the process is fully automated with computers. Either way, many of these systems have never been submitted for formal review or tested by an independent source.
Examination of a forex robot must include the testing of a trading system’s parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should do some research before putting money into one of these approaches.
Other Factors to Consider
Traditionally, many trading systems have been quite costly, up to $5,000 or more. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system today. Be especially careful of system sellers who offer programs at exorbitant prices justified by a guarantee of phenomenal results. Instead, look for legitimate sellers whose systems have been properly tested to potentially earn income.
Another persistent problem is the commingling of funds. Without a record of segregated accounts, individuals cannot track the exact performance of their investments. This makes it easier for retail firms to use an investor’s money to pay exorbitant salaries; buy houses, cars, and planes or just disappear with the funds. Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue of fund segregation; what occurs in other nations is a separate issue.
An important factor to always consider when choosing a broker or a trading system is to be skeptical of promises or promotional material that guarantees a high level of performance.
Other scams and warning signs exist when brokers won’t allow the withdrawal of monies from investor accounts, or when problems exist within the trading platform. For example, can you enter or exit a trade during volatile market action after an economic announcement? If you can’t withdraw money, warning signs should flash. If the trading platform doesn’t operate to your liquidity expectations, warning signs should flash again.
The Bottom Line
Conduct due diligence on the forex broker you’re considering by going to the Background Affiliation Status Information Center (BASIC), created by the NFA. Many changes have driven out the crooks and the old scams and legitimized the system for the many good firms. However, always be wary of new forex scams; the temptation and allure of huge profits will always bring new and more sophisticated scammers to this market.
Is Your Forex Broker a Scam?
If you do an internet search on forex broker scams, the number of results is staggering. While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.
When you’re looking to trade forex, it’s important to identify brokers who are reliable and viable, and to avoid the ones that are not. In order to sort out the strong brokers from the weak and the reputable ones from those with shady dealings, we must go through a series of steps before depositing a large amount of capital with a broker.
Trading is hard enough in itself, but when a broker implements practices that work against the trader, making a profit can be nearly impossible.
- If your broker does not respond to you, it may be a red flag that he or she is not looking out for your best interests.
- To make sure you’re not being duped by a shady broker, do your research, make sure there are no complaints, and read through all the fine print on documents.
- Try opening a mini account with a small balance first, and make trades for a month before attempting a withdrawal.
- If you see buy and sell trades for securities that don’t fit your objectives, your broker may be churning.
- If you are stuck with a bad broker, review all your documents and discuss your course of action before taking more drastic measures.
Separating Forex Fact From Fiction
When researching a potential forex broker, traders must learn to separate fact from fiction. For instance, faced with all sorts of forums posts, articles, and disgruntled comments about a broker, we could assume that all traders fail and never make a profit. The traders that fail to make profits then post content online that blames the broker (or some other outside influence) for their own failed strategies.
One common complaint from traders is that a broker was intentionally trying to cause a loss in the form of statements such as, “As soon as I placed the trade, the direction of the market reversed” or “The broker stop hunted my positions,” and “I always had slippage on my orders, and never in my favor.” These types of experiences are common among traders and it is quite possible that the broker is not at fault.
It is also entirely possible that new forex traders fail to trade with a tested strategy or trading plan. Instead, they make trades based on psychology (e.g., if a trader feels the market has to move in one direction or the other) and there is essentially a 50% chance they will be correct.
When the rookie trader enters a position, they are often entering when their emotions are waning. Experienced traders are aware of these junior tendencies and step in, taking the trade the other way. This befuddles new traders and leaves them feeling that the market—or their brokers—are out to get them and take their individual profits. Most of the time, this is not the case. It is simply a failure by the trader to understand market dynamics.
On occasion, losses are the broker’s fault. This can occur when a broker attempts to rack up trading commissions at the client’s expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers’ rates have not moved to that price.
Luckily for traders, this type of situation is an outlier and not likely to occur. One must remember that trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. Overall, it is in the best interest of brokers to have long-term clients who trade regularly and thus, sustain capital or make a profit.
The slippage issue can often be attributed to behavioral economics. It is common practice for inexperienced traders to panic. They fear missing a move, so they hit their buy key, or they fear losing more and they hit the sell key.
In volatile exchange rate environments, the broker cannot ensure an order will be executed at the desired price. This results in sharp movements and slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not.
Even in more transparent markets, slippage happens, markets move, and we don’t always get the price we want.
Communication Is Key
Real problems can begin to develop when communication between a trader and a broker begins to break down. If a trader does not receive responses from their broker or the broker provides vague answers to a trader’s questions, these are common red flags that a broker may not be looking out for the client’s best interest.
Issues of this nature should be resolved and explained to the trader, and the broker should also be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader is the trader’s inability to withdraw money from an account.
Broker Research Protects You
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:
- Do an online search for reviews of the broker. A generic internet search can provide insights into whether negative comments could just be a disgruntled trader or something more serious. A good supplement to this type of search is BrokerCheck from the Financial Industry Regulatory Authority (FINRA), which indicates whether there are outstanding legal actions against the broker. And if appropriate, gain a clearer understanding of the U.S. regulations for forex brokers.
- Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.
- Read through all the fine print of the documents when opening an account. Incentives to open an account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say they cannot withdraw the bonus funds. Reading the fine print will help make sure you understand all contingencies in these types of instances.
- If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more, and then attempt to make a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.
It should be pointed out that a broker’s size cannot be used to determine the level of risk involved. While larger brokers grow by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn’t always safe.
The Temptation to Churn
Brokers or planners who are paid commissions for buying and selling securities can sometimes succumb to the temptation to effect transactions simply for the purpose of generating a commission. Those who do this excessively can be found guilty of churning—a term coined by the Securities and Exchange Commission (SEC) that denotes when a broker places trades for a purpose other than to benefit the client. Those who are found guilty of this can face fines, reprimands, suspension, dismissal, disbarment, or even criminal sanctions in some cases.
SEC Defines Churning
The SEC defines churning in the following manner:
Churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence of churning. Churning is illegal and unethical. It can violate SEC Rule 15c1-7 and other securities laws.
The key to remember here is that the trades that are placed are not increasing your account value. If you have given your broker trading authority over your account, then the possibility of churning can only exist if they are trading your account heavily, and your balance either remains the same or decreases in value over time.
Of course, it is possible that your broker may be genuinely attempting to grow your assets, but you need to find out exactly what they are doing and why. If you are calling the shots and the broker is following your instructions, then that cannot be classified as churning.
Evaluate Your Trades
One of the clearest signs of churning can be when you see buy and sell trades for securities that don’t fit your investment objectives. For example, if your objective is to generate a current stable income, then you should not be seeing buy and sell trades on your statements for small-cap equity or technology stocks or funds.
Churning with derivatives such as put and call options can be even harder to spot, as these instruments can be used to accomplish a variety of objectives. But buying and selling puts and calls should, in most cases, only be happening if you have a high-risk tolerance. Selling calls and puts can generate current income as long as it is done prudently.
How Regulators Evaluate Churning
An arbitration panel will consider several factors when they conduct hearings to determine whether a broker has been churning an account. They will examine the trades that were placed in light of the client’s level of education, experience, and sophistication as well as the nature of the client’s relationship with the broker. They will also weigh the number of solicited versus unsolicited trades and the dollar amount of commissions that have been generated as compared to the client’s gains or losses as a result of these trades.
There are times when it may seem like your broker may be churning your account, but this may not necessarily be the case. If you have questions about this and feel uneasy about what your advisor is doing with your money, then don’t hesitate to consult a securities attorney or file a complaint on the SEC’s website.
Already Stuck With a Bad Broker?
Unfortunately, options are very limited at this stage. However, there are a few things you can do. First, read through all documents to make sure your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have to assume the blame.
Next, discuss the course of action you will take if the broker does not adequately answer your questions or provide a withdrawal. Steps may include posting comments online or reporting the broker to FINRA or the appropriate regulatory body in your country.
The Bottom Line
While traders may blame brokers for their losses, there are times when brokers really are at fault. A trader needs to be thorough and conduct research on a broker before opening an account and if the research turns up positive for the broker, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then a larger deposit can be made.
However, if you are already in a problematic situation, you should verify that the broker is conducting illegal activity (such as churning), attempt to have your questions answered, and if all else fails, and/or report the person to the SEC, FINRA, or another regulatory body that could enforce action against them.
Forex Lawyers – Forex Trading Scams
What is forex?
The forex market (FX) is the world’s largest trading market, dwarfing the stock exchange in size with nearly US$5 Trillion traded daily. The market is open 24 hours a day, when trading closes in New York it starts again in Tokyo and Hong Kong. Currencies are always traded in pairs, for example the US$ with the UK£ or the US$ with the EURO. With constant price fluctuations this tumultuous market can make Institutions, companies and some individuals a lot of money.
Most of forex trading happens in the spot FX market, which is different to the futures market in that currencies are physically exchanged in real time when a transaction is made. Whereas in the futures market the date the trading price is determined and the date the currency is exchanged are different. When a holiday maker goes to their bank to exchange currencies they are participating in the spot FX market.
Giambrone’s forex lawyers point to the following features of the forex market that make it susceptible to forex trading scams and forex frauds:
- There is no regulated centralised exchange.
- Currencies are traded via computer networks between one trader and the next, often referred to as over-the-counter (OTC).
- The forex market is a high leverage market. This is basically a loan by the broker to the trader allowing the trader to trade at a margin. A typical margin ratio will be around 50:1, 100:1 or 200:1 depending on the amount of currency being traded. At 100:1 the trader only needs to put up £1000 to cover a £100,000 trade. The reason brokers provide such high leverage is because currency fluctuations in the forex market are not usually more than 1% during any intraday trading. However even with small fluctuations, high leverage attracts inexperienced traders who may think the forex market is a get rich quick market, especially when compared to the permitted margins of 2:1 in equities and 15:1 in futures.
Is forex a scam?
The forex market is a legitimate trading market where the world’s currencies are traded. It is not a scam in-itself. Without the forex market it would be difficult to trade the currencies needed to buy imports, sell exports, to go on holidays or do cross border business. However with high leverage positions which, in theory, have the potential to make traders a lot of money and because there is no centralised/regulated exchange, scammers take advantage of the situation and the inexperienced traders desire to enter the market.
The forex market is a ‘zero sum’ market, which means that for the trader to make a profit, another trader will need to make a loss, the forex market does not in-itself add value to the market. Because a lot of the currency movements are directed by large well financed corporate institutions and banks, who are also better informed about the market as a whole, the undercapitalised trader is always likely to lose. Institutions and large banks trade in forex on a daily basis, to make a significant profit a considerable learning curve is involved.
Giambrone has found that scammers take advantage of the complexities around the forex market, maliciously withholding important information about market realities from their unsuspecting victims, claiming their scheme, information or software robot will bring success.
The following forex scams list documents the scam type that have been involved in forex frauds in some form in the past.
The signal seller scam is a scam which works by a person or a company selling information on which trades to make and claiming that this information is based on professional forecasts which are guaranteed to make the inexperienced trader money. They usually charge either a daily/weekly or monthly fee for this service but do not offer any information that helps the trader make money. They will usually have a slew of testimonials from allegedly legitimate sources in order to gain the trader’s confidence yet in reality do nothing to forecast profitable trades.
High yield investment programs
High Yield Investment Programs (HYIP) are (a lot of the time) a form of Ponzi scheme in which a high level of return is promised for a small initial investment into a forex fund. However in reality the initial investors are only being paid back by the money generated by the current investors and once there are no more investors in the scheme the owners usually close it down and take all money remaining.
Manipulation of bid/ask spreads
These types of scams have decreased over the years yet they are still around. This is why it is important to choose a forex broker who is registered with a regulatory agency, for example the CFTC and the NFA if in the USA. These type of scams would normally involve having spreads of around 7-8 pips instead of between 2-3 pips which is the norm.
Scams through software
Forex robot scammers lure novices with the promise of big gains from little effort or knowledge. They may use of fake or misleading figures to convince customers to buy their product. Their promises are flawed as no robot can adapt and thrive in all environments and markets. Software is generally used by professionals only to analyse past performance and to identify trends. All software should be formally and independently tested but caution is required when trusting the reviews themselves as these can be paid for. If their product did exactly what they claimed then they would not be selling it but instead using it exclusively themselves.
These can be a type of forex scam and there are many examples of managed accounts where they are. These involve a trader taking your money and basically using it to buy all sorts of luxury items for themselves. When the trader eventually asks for their money back there is not enough money left to repay.
Ponzi or pyramid schemes
This is a very common form of affinity fraud. They promise high returns from a small initial investment up front. The early investors usually do gain some sort of return on their money and motivated by this success they then recruit their friends and family into the scheme. However the truth is that the ‘investment opportunity’ does not actually exist and their initial return is being funded by money paid in by other members of the scheme. When the investor numbers start to drop the scammers close the scheme and take the money.
This type of scam involves the scammers usually getting people to buy shares in a worthless private company on the promise that when the company goes public their shares will increase substantially. However the company doesn’t really exist and may have a fake telephone number, office and website. Once the scammers have made all the money they can they will disappear with everyone’s investments.
How do I look out for forex scams?
The single most important thing a trader can do to avoid being scammed is to learn to trade on the forex market properly. The difficulty in this however is finding trustworthy brokers/teachers of forex that can be trusted. The amateur must know that the broker has actually made the money he/she says they have, due diligence is the key here. The forex market is not a casino but a very serious market where trillions of currency units are traded daily. Use demo accounts and learn to make long term profits first before trading for real. Be aware that like any professional skill, it can take years to master the forex trade properly. Any claim that says ‘you can make money quickly’ should be avoided.
Paul Belougour, Managing Director of a retail forex trading company has gone as far as to say, “if this is money you have worked hard for – that you cannot afford to lose – never, never invest in foreign exchange.”
Do not take at face value the claims that are made, take the time to make your own analysis. An inexperienced trader should be critical in their approach, analysing statistics and making their own functions that they have tested and had success with on a demo account first. This will take time to achieve but will serve the inexperienced trader better than trusting an automated computer program.
Other things a trader might want to check is the authenticity of the company making the claims or selling the expertise/course. To do this check the location/jurisdiction where the business is registered, as a lot of forex scammers will trade from a location where they believe the local law will make it hard for them to be prosecuted internationally.
What do I do if I have been scammed?
If you have been scammed report the scam to the appropriate authority. For the UK go to http://www.fca.org.uk/consumers/scams/report-scam.
As well as this it is a good idea to tell your story to the forex community so that other traders do not fall foul of the same scam. A good place to start is at www.forexpeacearmy.com, where there is a community of users involved in forex.
How can Giambrone help me if I have been scammed?
Giambrone is a leading mid size international law firms with a team of lawyers specialising in forex fraud. Giambrone assists traders in civil and criminal actions against unregulated forex companies, online internet fraudsters and pyramid schemes created on a Ponzi-style structure. Giambrone also specialise in legal actions against Binary Options trading companies.
Giambrone forex lawyers have recently been involved in:
Retrieving more than £1.5 million from the Traders International Return Network (“TIRN”)
TIRN promised high yield returns of between 9% – 22% by using “professional money managers” investing in the forex market. Yet in reality none of the trader’s money was invested in the market and TIRN’s operators misappropriated around US$15 million for their own personal benefit.
Giambrone advise investors in Finanzas Forex
Giambrone forex lawyers have been advising investors from Italy, Spain, Portugal, Malta, Scandinavia, Latin America (Brazil, Argentina, Columbia, Equador and Mexico) who have been victims of Finanzas Forex and the related Evolution Marketing Group (“EMG”). Finanzas Forex is now in liquidation and Giambrone are continuing to help traders recover funds from this scam.
Giambrone forex lawyers are also representing traders and investors in collective legal actions in relation to Telexfree, AGF Markets, LBinary, NRGbinary and others.
Giambrone makes the process of starting your claim straight forward
All that a forex victim has to do to start a claim is to complete an online claim form and send it back to Giambrone.
You will then be contacted by a forex lawyer who will advise you on how to proceed.
To start your claim now click here
Giambrone will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.
If you are a victimof online fraud / scam or have lost funds with a forex broker through no fault of your own, please contact our Client Relations Team to arrange a discussion with a lawyer in the Forex Trading Litigation team. Our international lawyers are able to provide assistance in English, French, Italian, Spanish, German, Arabic and Chinese.
How to Spot an Investment Scam in 6 Steps
Financial fraudsters use sophisticated and effective tactics to get people to part with their money. Here are six steps you can take to help you spot an investment scam.
8 common investment scams
Investment scams usually involve getting you to put up money for a questionable investment – or one that doesn’t exist at all. In most cases, you’ll lose some or all of your money. Here are some common scams.
Common investment scams
1. Advance fee scheme
In an advance fee scheme, the victim is persuaded to pay money up front to take advantage of an offer promising significantly more in return. The catch is that the scammer takes the money and the victim never hears from them again.
Scammers often target investors who have lost money in a risky investment. They’ll contact the investor with an offer to help recover their losses. They may say they will buy or exchange the investment at a substantial profit to the investor, but the investor must first pay a “refundable” fee, deposit or taxes. If the investor sends more money, they’ll lose that, too.
2. Boiler room scam
Investment scams are often pulled off by a team of people who set up a makeshift office, called a “boiler room”. To convince you their company is real, they might send you to the company’s website, which looks very professional. They might also set up a toll-free number and a respectable address to make the company seem legitimate.
However, the company doesn’t exist. Everything on the website is fake, and the office is just a post office box or temporary office. By the time you realize you’ve lost your money, the scammer will have closed up shop and moved on to another scam.
3. Exempt securities scam
When a company wants to sell securities in Canada, it must file a prospectus with securities regulators. Exempt securities are an exception. They may be sold without a prospectus, but they’re limited to accredited investors or certain other conditions.
On their own, exempt securities aren’t scams. But some scammers pitch fraudulent investments as “exempt” securities. Be suspicious if you get an unsolicited phone call or email about a hot tip on promising business that is about to “go public”. You may be told that the investment is only available to very wealthy people, but an exception will be made for you. You could be asked to sign some paperwork that misrepresents your income or net worth. If you have to lie about how much money you have, you are dealing with someone who breaks the rules.
How vulnerable are you to fraud?
4. Forex scam
The foreign exchange (forex) market is considered to be the largest and most liquid financial market in the world. Investors buy and sell currencies with the aim of making money on changes in exchange rates. But trading in foreign currencies can be very risky. Forex ads promote easy access to the foreign exchange market, often through courses or software. But foreign exchange trading is dominated by large, well-resourced international banks with highly trained staff, access to leading edge technology and large trading accounts. It’s extremely difficult to consistently beat these professionals. You may not be told how risky forex trading is.
In addition, some forex trading schemes may be illegal or fraudulent. Because forex trading services are often operated online from another country, unregulated firms may be marketing their services outside of the rules. Your money may not be invested as claimed, and you may be asked to wire money into an offshore account before you begin trading, where the money will be inaccessible. In any of these situations, you’re likely to lose some or all of your money.
5. Offshore investing scam
This scam promises huge profits if you send your money “offshore” to another country. In most cases, the goal is to avoid or lower your taxes. Be skeptical of tax avoidance schemes – you could end up owing the government money in back taxes, interest and penalties.
There are other risks of offshore investing, too. If you move your money to another country and something goes wrong, you won’t necessarily be able to take your case to a civil court in Canada. It may be impossible to recover your money.
Not sure if it’s a scam Scam When someone tries to make money by misleading or tricking another person. + read full definition ?
Use the Scam Spotter Tool and Investment Fraud Checklist to learn how to spot the warning signs of fraud.
6. Pension scam
This scam targets people who have retirement savings in a Locked-In Retirement Account (LIRA) Locked-in retirement account (LIRA) An account that holds money moved out of a pension plan. You may use one if you are changing companies and can take your pension savings with you. It works like an RRSP, but your money is locked in. You cannot withdraw the funds until you retire. + read full definition . In most cases, you can’t withdraw money from a LIRA until you reach a certain age, usually 55 or older. There are usually limits to how much money you can take out each year, and you’ll likely have to pay tax Tax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs. + read full definition on the money you withdraw.
The scam is often promoted in ads as a special “ RRSP RRSP See Registered Retirement Savings Plan. + read full definition loan Loan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date. + read full definition ” that lets you get around the tax laws and tap into your locked-in Locked-in An account that you cannot take money out of until you retire. In most cases, you can’t get a cash payout. Your plan may make exceptions if you have a terminal illness, or a small pension benefit. + read full definition funds. To get the loan, you must sell the investments you hold in your LIRA and use this money to buy shares of a start-up company the promoter is selling. In return, the promoter promises to loan you back 60% to 70% of the money you invested. They will keep the rest as a fee. You’re told you’ll get cash, pay no tax on it, and still hold a valuable investment Investment An item of value you buy to get income or to grow in value. + read full definition in your LIRA. But the investment you buy may be worthless, and you may never see the loan. You could lose your retirement savings.
7. Ponzi or pyramid scheme
These schemes recruit people through ads and e-mails that promise everything from making big money working from home to turning $10 into $20,000 in just 6 weeks. Or, you may be given the chance to join a special group of investors who are going to get rich on a great investment. The invitation might even come from someone you know.
Investors who get into the scheme early may receive high returns fairly soon from what they think are interest cheques. They’re often so pleased that they invest Invest To use money for the purpose of making more money by making an investment. Often involves risk. + read full definition more money, or recruit friends and family as new investors.
But the investment doesn’t exist. The “interest cheques” are paid from the investors’ own money and money from new investors. Eventually, new people stop joining the scheme. There’s no more money to pay out and you don’t see another cent. That’s when the promoters will vanish, taking all the money with them.
8. Pump and dump scam
In these schemes, scammers work through lists of potential investors to promote an incredible deal on a low-priced stock Stock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions. + read full definition . You don’t know that the person or company contacting you also owns a large amount of this stock and the stock may not represent a legitimate business. As more and more investors buy shares, the value of the stock rises sharply. Once the price hits a peak, the scammer sells their shares and the value of the stock plummets. You’re left holding worthless stocks.
4 signs of a scam:
- High returns and low risk.
- Hot tip Tip The sharing of important information about a company not known to the public. + read full definition or insider Insider Every director/senior officer of a reporting issuer; every director/senior officer of a company that is an insider or subsidiary of a reporting issuer; any person/company who owns or controls more than 10% of the voting securities of a reporting issuer. + read full definition information.
- Pressure to buy now.
- Seller not registered to sell investments.
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