How to spot a money trap
Investing can be a complicated process, full of confusing language and overwhelming options. If you're not careful, you can end up jeopardizing the security of your hard-earned money. Here are a few tips to help you protect your money and make smart choices.
Understand the terms of your investment
Make sure you understand the terms of your investment before you part with any money. That means fully understanding your own obligations and the obligations of your broker. In some cases a broker may deceitfully try to gain a higher degree of control over your money in order to use it inappropriately for his or her own gain.
Watch out for dishonest brokers
Most brokers are honest, hardworking people, but there are bad apples in any business. One common tactic used by dishonest brokers is "churning." Churning occurs when the broker simply makes unnecessary trades that do not benefit the account, while racking up the commission paid to them by each transaction. You can spot churning by reviewing your account on a fairly regular basis. If you see an unusual increase in transactions in your portfolio without any increase in value, your account is probably being churned.
If you suspect your broker is ripping you off, contact the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD).
If it looks too good to be true, it probably is. Investing can be a lot of fun, but don't expect any giant, lottery-sized returns on your money. So whenever you see investment opportunities advertising "guaranteed profits," "one-time offers," or "very high returns," you're probably looking at a scam. What the average person should be looking for when investing is healthy, steady gains.
Stay away from all investments that seem excessively risky. There is not great cause for alarm if you have invested in a "high-risk" mutual fund or GIC, because your portfolio is being handled by financial experts. But if you are managing your portfolio yourself, stay on the safe side and stick to reliable stocks and bonds. Avoid upstart companies and speculative investing, especially if you are an inexperienced investor.