Stark U.S. economic news and the debt worries have caused financial markets to gyrate dramatically over the past week.

On Monday, U.S. stocks posted their worst losses since the 2008 financial crisis, as the markets reacted to the news of the S&P’s historic downgrade of the U.S. credit rating and fears of a second recession began to set in. The downgrade news also affected markets in Canada, with the S&P/TSX sliding dramatically, only to start to recover on Tuesday.

With this kind of volatility comes uncertainty, especially for retail investors who are looking for solid, long-term returns on their investments. These are just the people who scam artists target with schemes that guarantee high returns, with little or no risk.

So, how can you, your friends, or your family members avoid falling victim to an investment fraud?

Don’t panic 

  • Fraud artists prey on fear. They know you are worried about your financial future and the safety of your investments. To get you into the scheme, they will offer safety and guarantees, like high monthly interest payments that can’t be achieved legally. Often, these offers turn out to be Ponzi schemes.

Take time to consider an investment  

  • Once scam artists get your attention, they will try to get you to buy right away. If you are suspicious, or even unsure of an investment, say “no”. Take the time to consider if the investment and the individual are legit. If you don’t, your money may be lost forever with little, or no hope, of recovery.

Watch out for investments based on fads  

  • Right now, gold is trading at record highs. You’ve probably seen the recent surge in ads in newspapers and online offering to buy gold jewellery. Fraud artists watch the markets and trends too. They will try to capitalize on whatever is hot, whether it be gold, a foreign currency, or an industry that is being talked about a lot. They will then create a scam that uses that fad to their advantage.

Learn to spot the warning signs of a scam  

  • Even though fraudsters grasp onto fads, securities regulators tend to see the same schemes come and go. Every scam tends to have one or more warning signs, which we call “red flags”. Learn them, they will help you protect your money.

Stick with your plan  

  • If you have a financial plan, don’t let a fad or fear get you off track. If you don’t have a plan, now is the time to put one together. This way, you will be able to say no to pressure tactics and offers that sound too good to be true.

For more information on how to spot a scam and to learn about the warning signs of an investment scam, visit the Investor Protection section of our website.

Suggested Reading

New video shows you how to recognize, reject, and report investment fraud

Genius Funds hearing at BC Securities Commission, April 7, 2010

Three companies and suspended registration added to caution list

More Resources

CRA tax scam warning and news from regulators

With the April 30 tax deadline closing in, we are reminding people to be on the lookout for tax scams. The Canada Revenue Agency (CRA) publishes a webpage with the top five tax scams, warning that these are illegal schemes that could have serious consequences if you get involved. In addition to fees you may […]

Understanding risk vs. return when investing in private companies

Last week, we received a question from a reader that I felt was a good topic for a blog post for a couple of reasons: it is timely, and it gives me an opportunity to discuss how we handle comments. I’ll start with our comment policy first, and then I’ll deal with why the question […]