Where ever there is a lot of money their will be scammers. The finance industry is no different. The majority of all services offered are honest but there is a small number of dishonest companies and individuals that will try to scam you out of your money if you let them. It is up to you to learn how to spot and avoid scams.
No one can ever be 100% sure if something is a scam or not. Things that looks legit might be a scam. Enron and Bernie Madoff are two good examples of this. Big scams that fooled the entire world. Many of the hardest scams to spot are scams that started out as honest ventures and then turned into a scam due to unexpected circumstances. Once honest men that try to hide the truth until they can repair their mistakes only to sink ever deeper.
You should always try to make sure that you do not get scammed. You can as earlier mentioned never be 100% sure that you will not get scammed but you can make it harder to scam you. You can minimize the risk that you will get scammed and you can make sure that the damage is limited if you do get scammed.
Most scammers are going for the lowest hanging fruit. They try to scam the most gullible among us. That will give the highest possible return from the lowest possible effort. There is a reason that Nigeria Letters are written in such poor English. They help filter out the people that are most likely to fall for the scam. No one else would ever reply to the emails.
Most scammers will move on to other victims if you make yourself a challenging mark.
Dishonest financial advice
Most people think that a financial adviser needs to give you good advice. That they have to suggest the best investment opportunities for you. This is wrong. Financial advisers have no obligation to give good advice or to prioritize your interests. They are in fact allowed to put their own interest before yours and are free to sell you whichever financial product that is most profitable for them to sell. They are basically sales men, not advisers.
Many financial advisers will recommend poor products that give them a high sales commission. A common example of this is that many advisers recommend annuities. Annuities are almost never a good option but they make a lot of money for the advisers and banks.
Financial advisers working in banks have order to sell that banks products and often have certain products they are supposed to recommend regardless of whether they suit the customer or not.
Financial advisers are the one scam that cost people the most money each year. The money stolen by more traditional scammers is pocket change compared to the money that advisers cost people each year.
Never trust a financial adviser unless the adviser is a fiduciary. A fiduciary is obligated to put your interest first. They do however still have a lot of leeway to recommend less than ideal products.
Boilerroom scams are scams that contacts you and try to convince you to invest with them. They usually offer to invest your money in a penny stock that they claim is primed for a big break and that they promise will make you a lot of money. They will end up costing you money. Never invest over the phone. Ask them to send you written info. They most likely wont.
Pump and dump scams
Often used in combination with boilerroom operations but can also by done without a boilerroom operation. A pump and dump is a scam where a group investors buy a large number of stocks in a penny stock at a very low price. Once they own enough shares they start to artificially inflate the price. They do this by spreading disinformation on forums and by trading small positions in the company at ever higher prices. Soon others will spot that the stock is rising and start investing in the stock. This will help drive the stock even higher. The increase in stock value and the hype that is created in forums will cause the stock price to climb even higher. Once the stock has reached a certain level the original investors will start selling their large positions. They do what it takes to keep the stock price high during the sell of. Once they have sold all their stock they will move on to a new stock. Once this happens the stock price will start falling and will soon be back at the original low levels. These scams can allow you to make money as long as you exit the stock before it is to late.
Binary options, cfd and a number of other financial instruments have been plagued by fake brokers that offer products similar to those mentioned but that are designed to make you lose your money. These brokers are seldom regulated and they will do whatever it takes to make sure that you lose your money including manipulating the outcome of options. In some cases they simple steal your money without even trying to make it seem like you lost them honestly.
Always be aware of these scams and make sure that you chose a well establish regulated broker if you want to try trading these instruments.