Investor BehaviorHow-to
How do you spot the red flags of investment fraud before you send money?
Learn the red flags regulators list for investment fraud, how Ponzi and relationship scams work, and a step-by-step check to run before you send any money.
Quick answer
The classic red flags are promises of high returns with little or no risk, pressure to invest right now, unlicensed sellers, unregistered products, "everyone is buying" pitches and requests to pay by gift card, crypto or wire. Before sending money, pause, verify the seller and the investment, and ask questions.
Key points
- The FBI's 2025 Internet Crime Report counted 1,008,597 complaints and nearly $21 billion in reported losses; investment fraud accounted for nearly 49% of scam-related losses.
- Regulators' top red flags include guaranteed or risk-free returns, pressure to act now, unlicensed sellers and unusual payment methods.
- A Ponzi scheme pays existing investors with money from new investors, so it collapses when new money slows.
- You can check a seller's background for free with FINRA BrokerCheck and look up company filings on the SEC's EDGAR system.
- If you suspect fraud in the U.S., you can report it to the SEC and to the FBI's Internet Crime Complaint Center.
How big is the investment fraud problem?#
Big enough that anyone can be a target. The FBI's 2025 Internet Crime Report counted 1,008,597 complaints, and cyber-enabled crimes defrauded Americans of nearly $21 billion[1]. The FBI says investment fraud remains the primary driver, accounting for nearly 49% of all scam-related losses[1].
FBI Internet Crime Report, 2025 data (U.S. complaints)
These figures cover only the cases people reported to the FBI. Being careful or experienced is not full protection either: in a FINRA Foundation survey, 51% of investors who feel highly knowledgeable could not identify the warning signs of fraud[2]. Our note on overconfidence looks at why.
What are the classic red flags of investment fraud?#
The SEC's Investor.gov keeps a checklist. Its red flags include unlicensed investment professionals, offers that sound "too good to be true", "risk-free" opportunities, promises of great wealth and guaranteed returns, "everyone is buying it" pitches, pressure to invest right now, and being asked to pay by credit card, gift card, or wiring money abroad or to a personal account[3].
| Red flag | What the pitch sounds like | Why it matters |
|---|---|---|
| Promises of guaranteed or risk-free returns | "You can't lose — returns are guaranteed." | Every investment carries some degree of risk; high returns entail high risks. |
| Pressure to act now | "This offer is gone tomorrow." | Urgency is meant to stop you from checking. A legitimate offer can wait while you do. |
| "Everyone is buying it" | "All your friends are in already." | Social proof replaces evidence. It is a herd pitch, not a reason. |
| Unlicensed seller or unregistered product | "We don't need all that paperwork." | Securities sellers generally must be licensed or registered; schemes often are not. |
| Unusual payment method | "Pay with gift cards, crypto or a wire to my account." | Investor.gov lists these payment requests as a red flag. |
| Overly consistent returns | "We make 2% every single month." | Real investments go up and down over time. |
Red flags and explanations from Investor.gov's checklist, fraud-avoidance page and Ponzi scheme page, and the CFTC's alert on relationship scams.
Investor.gov explains the logic behind the first flag: every investment carries some degree of risk, which is reflected in the return you can expect, and high returns entail high risks, possibly including a total loss[4]. It also warns about the halo effect — being blinded when a con artist comes across as likeable or trustworthy — because credibility can be faked[4].
How does a "small" monthly return give a scam away?#
A pitch may quote returns per month, per week or even per day, where the numbers can sound modest. Investor.gov suggests comparing promised yields with current returns on well-known stock indexes; anything claiming substantially more could be highly risky[4]. Converting the pitch to a yearly figure makes the comparison easy.
Worked example
Worked example: what pitched monthly or weekly returns add up to in a year
Each figure assumes the pitched rate is earned every period and reinvested. A pitch claiming 3% a month is claiming more than 42% a year, every year, and one claiming 1% a week is claiming nearly 68%.
| Pitched return | Implied yearly return | $1,000 after one year |
|---|---|---|
| A pitch of 1% a month | 12.7% | $1,126.83 |
| A pitch of 3% a month | 42.6% | $1,425.76 |
| A pitch of 5% a month | 79.6% | $1,795.86 |
| A pitch of 1% a week | 67.8% | $1,677.69 |
| A pitch of 0.5% a trading day (252 days) | 251.4% | $3,514.37 |
Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.
How do Ponzi schemes and relationship scams work?#
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors[5]. In many Ponzi schemes, the fraudsters do not invest the money at all[5]. Early investors receive "returns" — really other people's money. With little or no legitimate earnings, these schemes require a constant flow of new money, and they tend to collapse when it becomes hard to recruit new investors or when large numbers of investors cash out[5].
How a Ponzi scheme keeps going, until it doesn't
The arithmetic is unforgiving. If a scheme raises $1,000,000 and pays out 3% a month with no real earnings, it pays $30,000 a month and runs out of cash in about 33 months — sooner if the operators take money for themselves. To keep going, it must keep finding new victims.
Relationship investment scams take a slower route. The CFTC describes them as "long cons", with a long, slow build before the fraudster springs the trap[6]. Contact often starts online or by text message. The fraudster may show fake screenshots or manipulate the target's online account to suggest profits, and when the target tries to withdraw, may demand more money for fees or taxes[6]. FINRA adds that scammers can use AI to clone voices, alter images and create fake videos[7].
How do you check an investment offer step by step?#
Run these checks before you send any money, in order. Investor.gov's own short version is to ask questions, research every opportunity thoroughly, and conduct a background check on any investment professional[3].
Pause and take the pressure off
Do not decide on the same day. The FBI advises people to resist pressure to act quickly and assess the situation before turning over money or personal information[1].
Ask questions until you understand it
How does the investment make money? What are the risks and fees? How do I get my money out? Investor.gov advises avoiding investments you don't understand or can't get complete information about[5].
Get an outside opinion
Talk it over with someone you trust who has no stake in the deal. Never rely solely on testimonials, as the CFTC puts it[6].
What should you do if you think you've been scammed?#
Stop sending money, including any "fee" or "tax" demanded to release your funds — the CFTC describes such demands as a common step in relationship scams[6]. Then report it. The FBI asks victims to contact a local FBI office or file at ic3.gov as soon as possible, and to keep details such as the scammer's name, how and when they made contact, how you paid and where the money went[1]. The SEC accepts tips, complaints and referrals through its online TCR system[9].
Scams are only one way investors lose money to emotion and pressure. Our notes on herd behavior and bubbles and reading financial news cover the same tactics in a legal setting, and the before-you-invest checklist covers the basics to have in place first.
What mistakes do beginners make?#
Trusting a pitch because the person seems nice
Investor.gov warns about the halo effect: credibility can be faked. Check qualifications and registration, not personality.
Treating small monthly numbers as modest
A few percent a month compounds into extraordinary yearly figures. Convert any pitch to a yearly return and compare it with what broad markets have done.
Paying a fee to withdraw your own money
Demands for extra fees or taxes before you can cash out are a known scam step. Stop paying and report it.
Skipping the background check because it feels awkward
Looking up a seller on BrokerCheck is free and takes minutes. A legitimate professional expects it.
What else do beginners ask?#
What is the single biggest red flag?
Can a scam use a real-looking website or app?
Yes. The CFTC notes fraudsters may direct targets to a legitimate-looking but fake website, or show fake trading information and screenshots[6]. A polished interface proves nothing.
How do I check if a broker is legitimate?
In the U.S., search the person and firm on FINRA BrokerCheck, which shows registrations and any disciplinary history[8]. Rules differ by country, so outside the U.S. check your own securities regulator's register.
What is the bottom line?#
Investment fraud depends on speed, trust and big promises. The red flags regulators list — high returns with little risk, pressure to act now, unlicensed sellers, unregistered products and unusual payment methods — all aim to stop you from checking. The defense is a routine you run every time: pause, verify the seller and the product, ask questions, think about how you are asked to pay, and report anything suspicious.
Sources
Numbers in brackets in the text point here. Grade A = primary source (regulator, statistics agency, law or official document).
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