When you have a promising new investment opportunity, it’s tempting to jump on board right away. At the same time, you’re naturally wary of committing to something that might not work out – or worse, something that is a fraud. How can you tell the difference?
Here are five questions the SEC recommends you ask before you invest. Answering them will weed out most bogus investment opportunities and help ensure the investment is in line with your goals.
Is the person trying to sell the investment licensed?
Brokers and investment advisers must be licensed, and details on their background and qualifications are publicly available through FINRA’s BrokerCheck or the Investment Adviser Public Disclosure website. You can also look up whether the individual is subject to any SEC actions.
Is the investment registered with the SEC?
Did you know that all securities must be registered with the SEC or be exempt for a specific reason? You should not be playing around with unregistered securities. You can check whether an investment is registered using the SEC’s EDGAR database.
How do the risks weigh against the potential rewards?
If someone tells you an investment comes with great potential rewards but little risk, it’s almost certainly a fraud. What is the best ratio of risk to reward?
Every investment comes with a level of risk, but some are substantially more risky. You should honestly evaluate your tolerance for risk.
Your broker or investment advisory firm should discuss your risk tolerance with you and should never recommend investments outside your zone of tolerance. If they do recommend an unsuitable investment, you may have recourse through FINRA.
How well do I understand the investment opportunity?
Have you read the investment’s prospectus or disclosure statement? You should. Make note of anything you don’t understand. Can you easily describe what the investment is and how you will potentially make money? If not, be extremely wary. If you’re still interested, discuss the opportunity with a lawyer or trusted financial professional.
Who can I turn to for help?
Before you invest, be aware that there are free tools available through securities regulators like FINRA, the SEC and state securities regulators. These include the tools above, but also general information about investing wisely and links to report suspicious investments.
If you believe you have invested in a fraud, or if your broker or investment adviser sold you an inappropriate investment, contact an attorney who handles securities law right away. In the right circumstances, you may be able to get your money back through a FINRA arbitration.
