Key takeaways
- The SEC's first red flag: a promise of high returns with little or no risk. Every investment involves risk.
- Pressure to act now, claims of inside information and 'can't miss' bandwagon pitches are reasons to slow down and research.
- Unsolicited contacts, relationship scams that start with a wrong-number text, affinity fraud and impersonated professionals are routes the SEC warns about.
- Requests to pay by gift card, credit card, overseas wire, payment app or crypto, or to pay a different company, are warning signs.
- Check a professional's registration before investing, never share account or identity details with a stranger, and report suspected fraud to the SEC.
The SEC notes that fraudsters are constantly changing the way they approach victims, from spam e-mail to social media messages, wrong-number texts and videos of lavish lifestyles. Its investor education pages list the red flags to watch for, and this checklist groups them by where they show up: in the promise, in the person, in the payment and in the stock tip.
Red flags in the promise
- High returns with little or no risk. The SEC is blunt: there is no such thing as high guaranteed investment returns, and every investment involves risk. Its social media alert adds that if an investment is genuinely safe, you will most likely get a low return.
- Pressure to act now. A short deadline, a deal "only available to a limited number of investors", or a claim of inside information that you must act on before others find out. The SEC calls this a false sense of urgency, and its answer is to take your time and research before deciding.
- "Can't miss" and the bandwagon. Pitches that say lots of people are already investing, or that offer a way in on the ground floor of a hot industry. The SEC names crypto assets and artificial intelligence as current examples.
- Hype language. The SEC's alert quotes phrases such as "INCREDIBLE GAINS", "BREAKOUT STOCK PICK" and "HUGE UPSIDE AND ALMOST NO RISK!" as hallmarks of extreme risk or outright fraud.
Checking a promise with arithmetic
The SEC suggests comparing any promised return with the returns of well-known stock indexes; what a stock market index is explains those benchmarks. Simple compounding exposes many promises.
The SEC's alert describes a case in which a website allegedly offered investors a "guaranteed return" of 1.2% per day. Compounded daily for a year:
| Period | Growth factor | $1,000 becomes |
|---|---|---|
| 30 days | 1.012³⁰ ≈ 1.43 | about $1,430 |
| 365 days | 1.012³⁶⁵ ≈ 77.8 | about $77,800 |
A promise that turns $1,000 into nearly $78,000 in a year, with a guarantee, is exactly the kind of claim the SEC says not to believe. The same alert says high-yield investment programs, or HYIPs, may promise annual, monthly, weekly or even daily returns of 30 or 40 percent or more, and that they are often frauds. Compound interest explained shows how the growth formula works.
Red flags in the person
- Unsolicited contact. The SEC says to exercise extreme caution with any message about an opportunity from someone you did not ask and do not know. Its advice for an unsolicited "can't miss" pitch: pass it up and report it.
- Relationship scams. These often start with a social media message or a wrong-number text. The scammer builds trust slowly, then offers "investment" advice; you may believe you are buying a crypto asset while sending money straight to the fraudster's wallet.
- Affinity fraud. Scammers claim to share your faith, community or professional group, or recruit a trusted member of it. The SEC's advice is to research the investment and the person even when the introduction came from someone you trust.
- Impersonation. Fake profiles, handles and webpages that copy a real firm's logo or a real employee's name.
- Manufactured credibility. Paid fake reviews, exaggerated credentials, and celebrity endorsements that may be fake, or genuine but still a poor fit for you.
Red flags in the payment
The SEC says to be wary if you are asked to pay:
- by credit card, gift card, overseas wire transfer, peer-to-peer payment app or crypto assets;
- to a different company from the one you thought you were investing with;
- to a suspicious address, such as a P.O. box or virtual address; or
- with a note describing the payment as something unrelated, such as luxury watches or furniture.
What a brokerage account is explains how opening one works, and SIPC protection explains a protection that applies only at member firms and why payments should go to the firm itself.
Red flags in the stock tip: pump-and-dump
The SEC describes pump-and-dump schemes as the touting of a stock, typically a small "microcap" company, through false and misleading statements, often on social media, message boards and chat rooms, with posts urging readers to buy quickly. Promoters may claim inside information or an "infallible" stock-picking system. In reality, the SEC explains, they may be insiders or paid promoters who profit by selling once the buying frenzy has pumped up the price. When they dump their shares and stop the hype, the price typically falls and investors lose money.
What to do instead
- Research before investing. Check a professional's registration with a background check on Investor.gov; the SEC also points to FINRA's BrokerCheck, the Investment Adviser Public Disclosure website and the SEC's EDGAR database of company filings.
- Protect your information. Do not share bank or brokerage details, tax forms, card numbers, your Social Security number, passport or driver's licence details with a stranger who contacts you about an opportunity.
- Report it. Suspected securities fraud can be reported to the SEC at sec.gov/tcr; help.sec.gov handles complaints and questions.
None of this is a guarantee against every scam, but each flag is a reason to stop and check. Learn to Trade Stocks Beginner, one of our education apps, uses virtual money only; its listing states it involves no real-money brokerage transactions and does not guarantee profits. The investing basics hub has the related guides, including risk tolerance and the risks of options.
Good to know
Frequently asked questions
What is the biggest red flag of investment fraud?
How does a pump-and-dump scheme work?
How can I check whether someone is allowed to sell investments?
Where can I report suspected investment fraud?
Sources
- Protect Your Money: How to Avoid Investment Scams (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Updated Investor Alert: Social Media and Investing – Avoiding Fraud (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
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