Some of the abusive investment schemes in cyberspace are indistinguishable from those that have been used elsewhere for decades. The online world, however, represents an enormous advance in the ability of con artists to victimize the unwary.
Some simple precautions can keep you from becoming a victim.
Don't believe everything you read. Evaluate the information you get online in the same way that you would a whispered hot tip from a stranger. Exercise healthy skepticism and remember how easy it is for people to disguise their identity online. Keep in mind that investment schemers will often talk up projects in remote corners of the globe that can't be easily checked out, or use endless technical jargon that can only be debunked by experts.
Don't assume you know whom you are talking to. Bulletin board and discussion group participants may not be who they say they are. Those who recommend specific securities may have no investment qualifications and may well have ulterior motives.
Don't assume that your online service provider polices its investment bulletin boards. Most don't. The volume of postings often swamps the ones that try. Often there is nothing to stop a con-artist from posting one or one hundred pitches for a swindle.
Don't buy thinly traded, little known securities on the basis of online information. These are the securities most susceptible to manipulation. Unlike blue chip stocks, the price of thinly traded, low priced shares can be moved significantly through relatively small strategic trades. This is why online hype usually concerns little known junior companies. Always take the time to do your own research based on reputable information sources, and seek the advice of a qualified, independent financial adviser the time to do your own research based on reputable information sources.
Don't get suckered by claims made about ‘inside information'. Investment bulletin boards and discussion groups are riddled with supposed hot tips that are sure to send some stock soaring in value. Ask yourself, "If this is such great news, why are they telling me?" These hot tips are seldom, if ever, true. Besides, even if they are true, trading on inside information is illegal.
Be on the lookout for conflicts of interest. Some of the people who analyze and recommend securities online are being paid by the company whose shares they are recommending. Some disclose this fact, while others make no mention of their conflict of interest. Make sure you know why someone is enthusiastic about an investment opportunity.
Make sure that the security has been qualified for sale and is being sold by a person properly registered with your securities regulator. Securities regulations designed to protect investors from fraud and abuse do apply in cyberspace. The failure of companies, dealers or advisers to comply with regulations is often a red flag highlighting a potential investment scam. Your securities regulator can tell you whether an individual or company is registered to trade or advise in your area and whether the company selling the securities has filed a prospectus.