Most common types of financial scams an individual investor should beware of?
"Affinity fraud. You see, Madoff really didn't have to sell himself, people recommended him to their friends.  In a similar way, it's easy once a scammer reels in one sucker to keep him on the hook long enough to get 10 friends to invest as well.  I've written about Mortgage Acceleration scams, and the common thread is that they are first sold to friends, relatives, neighbors. People tell their fellow church goer about it and pretty soon people's belief just takes over as they want it to work.  Edit - the scam I referenced above was the ""Money Merge Account"" and its reincarnated ""Wealth Unlimited."" It claimed to use sophisticated software to enable one to pay their mortgage in less than half the time while not changing their budget. The sellers of the product weren't able to explain how it was supposed to work, since it was nonsense anyway. You were supposed to be able to borrow against a HELOC at a rate higher than your mortgage, yet come out ahead, enough to cut the time in half or less. The link I posted above leads to a spreadsheet I wrote in a weekend, which was better at the math than their software and free. It also linked to 66 pages of accumulated writing I did over a number of months starting in 2008. In the end, I never saw any prosecution over this scam, I suppose people were too embarrassed once they realized they wasted $3500.  How can I get scammed buying S&P ETFs through Schwab? Easy, I can't." "If an offer ""is only valid right now"" and ""if you don't act immediately, it will expire"" that is almost always a scam." In the case of an investment strategy, if you don't retain custodianship over your funds, or at least determine who is the custodian, then walk away.  You should be able to get accurate account statements from a trustworthy third party at all times. If anyone offers you guaranteed better than average returns, run. They are either lying to you or to themselves. (Claiming that they will try to beat the market is more credible, but that becomes a matter of whether there is any reason to believe that they'll succeed.) If anyone sends you an unsolicited stock tip, run. They wouldn't be doing so if it wasn't an attempt to manipulate you or the market or both. Most likely its a pump-and-dump attempt. "Investing in a business can be daunting and risky, so it is not for everyone. The most common pitfalls are mentioned here:  Beyond that:  It all sounds a bit like ""Don't trust anyone"" and sadly, this is true when there's a lot of money involved. So be prepared and do your homework, this sometimes will save you more money than you gain with your investments :) Good luck!" Anything where the initial step of someone trying to get you into anything financial is to send you an e-mail. There are valid situations in which e-mails may be used to introduce you to a financial product or offer, such as if you have signed up for an electronic newsletter that includes such information. But in that particular case, the e-mail isn't the first step; rather, whatever caused you to sign up for the newsletter was. Even in a valid, legitimate scenario, you should obviously still perform due diligence and research the offer before committing any of your money. But the odds that someone is contacting you out of the blue via e-mail with a legitimate financial offer are tiny. The odds that a lawyer, a banker or someone similar in a remote country would initially contact you via e-mail are yet smaller; I'd call those odds infinitesimal. Non-zero, but unlikely enough that it is probably more likely that you would win the grand prize in the state lottery four times in a row. Keep in mind that responding in any way to spam e-mails will simply confirm to the sender that your e-mail address is valid and is being read. That is likely to cause you to receive more spam, not less, no matter the content of your response. Hence, it is better to flag the e-mail as spam or junk if your e-mail provider offers that feature, or just delete it if they don't. The same general principles as above also apply to social media messaging and similar venues, but the exact details are highly likely to differ somewhat. Cosigning on a loan. More broadly any exchange of value between family members or friends. Despite good intentions, these often go awry. If some one ever offers High returns and low risk they are either extremely stupid or scamming you. If they did find a high return low risk investment a smart person would buy it then repackage it as a low return low risk investment and then sell it to you. People would still buy and they would make a ton.   Either they are lying (scam) or a fool(about as bad) Pretty much any financial transaction where they start by calling you on the phone is a scam. They aren't doing it for your benefit and the caller is on commission.
You're going to have a hard time finding a legit investment planner that is willing to do things like take short-term positions in shorts, etc for a small investor. Doing so would put them at risk of getting sued by you for mismanagement and losing their license or affiliation with industry associations. Lending of securities is done by institutional investors and mutual funds. The costs of dealing with thousands of individual investors, small share blocks and the various screw-ups and drama associated with each individual are too high. Like many exotic financial transactions, if you have to ask about it, you're probably not qualified to do it. Is there any truth to this, or is this another niche scam that's been brewing the last few years? While it may not be an outright scam, such schemes do tend to be on borderline of scams. Technically most of what is being said claimed can be true, however in reality such windfall gains never happen to the investors. Whatever gains are there will be cornered by the growers, trades, other entities in supply chain leaving very little to the investors.  It is best to stay away from such investments. GIC perhaps? These would be quite similar to Certificates of Deposit where one is agreeing to lock up their money for a term and be paid a percentage for doing so. There are various kinds as some may be linked to market returns in some cases and others are just simple interest. "Mostly ditto to @grade'eh'bacon, but let me add a couple of comments: Before I did anything, I'd find out more about what's going on. Anytime someone tells me that there's a problem with ""security codes or something"", I get cautious. Think about what the possibilities are here. Your relative is being scammed. In that case, helping him to transfer his money to the scammer is not the kind of help you really want to give. Despite your firm belief in your relative's integrity, he may have been seduced by the dark side. If he's doing something illegal, I'd be very careful about getting involved. My friends and relatives don't ask me to commit crimes for them, especially not in a way that leaves me holding the bag if things go wrong. Assuming that what is going on here is all legal and ethical, still there is the possibility that you could be making yourself liable for taxes, fees, whatever. At the very least I'd want to know what those are up front. As @Grade'eh'bacon, if he really has a problem with a lost password or expired account, by all means help him fix that problem. But become someone else's financial intermediary has many possible pitfalls." "I will disagree with some of the other answers here.  In my view, the most important dimension of the situation is not your friend's potential loss but the potential losses of the people he may convince by using his position as youth group leader, etc., to draw more them into the scam. Exactly how to handle this depends on many factors that aren't mentioned in your question (and probably rightly so, as this aspect of the situation moves beyond personal finance).  For instance, if your friend is a ""pillar of the community"" who is widely trusted, and you are not, there may be little you can do, since people will believe him and not you.  If you have some influence over the groups he is trying to recruit, you can attempt to provide a counterweight to his recruitment activities. Again, how to do this depends on other factors, such as how he is recruiting them.  If he is just privately contacting individuals and inviting them to these meetings, you may have to just keep your eyes peeled for anyone who seems tempted and try to dissuade them before they suffer the ""brainwashing"".  If he actually tries to do some sort of public recruitment (e.g., holding a meeting himself), you could try to inject doubt by, e.g., attending and asking probing questions to expose the dangers.  If you think the danger is widespread, you could consider taking some more public action, like writing a column in a local paper about this organization. Of course, another major factor is how much you think people stand to lose by this.  However, in your question you indicated that your friend has invested ""multiple month or years of income"".  If he intends to pressure others to invest similar amounts, this sounds to me like enough danger to warrant some preventive action.  Few people can afford to lose months or years of income, and sadly those most vulnerable to a scammer's siren song are often those who can least afford it.  It doesn't sound like a situation where you'd have to devote your life to the cause of stopping it, but if I knew that dozens of people in my community stood to lose years of income, I'd want to make at least a small effort to stop them, rather than just keep my mouth shut. In doing this, you may lose your friendship.  However, you stated that your goal is to resolve the situation in a way that is ""best with lowest loss of money for everybody"".  If you really take this utilitarian view, it is likely that you may have to give up on the friendship to prevent other people from losing more money." "They're not at all the same. A Ponzi scheme is a fraudulent investment method that pays off early investors with deposits from later ones. Fractional reserve banking is the practice of keeping only a fraction of a bank's demand deposits on reserve, while lending out the rest.  The reserve requirement is how central banks limit the amount of money that can float around in commercial banks. In the latter case, there is no ""later investor"" somewhere down near the bottom of a money food chain.  Every dollar, regardless of whether it was created fresh from one of the federal reserve banks or created via several chained loans, is worth the same.  If the dollars depreciate for whatever reason, they do so for everyone. Now, if you want a good example of a Ponzi scheme that is actually legal, look at Social Security. Edit: A ""debt-based society"" is separate from fractional-reserve banking.  If the Fed creates $1,000,000, the total amount of money that can float around is still capped based on whatever the reserve requirement is.  (For a 10% reserve requirement, it's something like $10,000,000.)  We have unsustainable debt increases because of lack of self-control on the part of our leaders.  The fractional-reserve process helps it along, but it's not the culprit.  It's an enabler." If anyone could reliably pick winners, they could make more money by investing in those winners than by selling their advice. Generally, when someone sends you unsolicited hype about stocks, that's because they're trying to pump the price up so they can dump their own shares before it collapses again. Also note that, these days, it's remarkably easy to run the scam where you sell half your customers buy advice and the other half sell advice on the same stock. Each time, some of the customers drop out in disgust (half, minus whoever decides to give you another chance) and the rest pay you for the next iteration. You can make a lot of money before you run out of suckers. That, all by itself, is good reason to be skeptical about anyone who doesn't publish their full history so it can be audited for such shenanigans. A pattern of high level people buying or selling is a sign, positive or negative. An individual, not so much. He can be selling to diversify, trying to keep his investments from being all in the company. He can be selling to pay his large bills. Same reasons any of us might be selling an investment to have cash to use. "Careful with the ""stock stolen from your account"" thing.  SIPC protects investors against broker/dealer insolvency.  Don't think they provide protection against theft." Yep! And /u/msattam, if you're just getting started with learning this stuff...  &gt; So the company, acting in the investors' best interest...  ... while u/S4ndals is correct here in an academic sense, to expand on his point, you'll soon find the mileage to vary quite a bit on this issue in the real world. The vast majority of companies rarely act in the investors' best interest as a whole. It's uhhh, it's complicated. I believe the only thing you haven't mentioned to him is the possibility that his activity is criminally fraudulent. I would sit him down, and say something substantially similar to the following: We've talked about your investment before, and I know you believe it's fine.  I just want to make sure you understand that this is very likely fraudulent activity.  I know you believe in it, but you've said you don't understand how or why it works.  The problem with that is that if it is a fraud you can't protect yourself from criminal prosecution because you didn't understand what you were doing.  The prosecutor will ask you if you asked others to give you or the organization money, and then they will convict you based on trying to defraud others. It doesn't matter whether you did it on purpose, or just because you believed the people you are investing in. So I very strongly advise you to understand exactly what the system is, and how it works, and then make sure with a lawyer that it's legal.  If it is, then hey, you've learned something valuable.  But if it's not, then you will save yourself a whole lot of trouble and anguish down the road if you step away before someone you attract to the investment decides to talk to their accountant or lawyer.  A civil lawsuit may be bad, but if you're criminally prosecuted it will be so much worse. Now that I've said my piece, I won't talk to you about it anymore or bother you about it. I wish you luck, and hope that things work out fine. I wouldn't talk to the police or suggest that I'd do anything of that nature, without proof then there's no real way to start an investigation anyway, and unfortunately scams like this are incredibly hard to investigate, so the police often spend little to no time on them without a high level insider giving up evidence and associates. Chances are good nothing would happen to your friend - one day the organization will disappear and he won't recover any more money - but there's a distinct possibility that when that happens, the people below him will come for him, and he won't be able to look further up the chain for help. Perhaps the threat of illegal activity will be enough to prevent him from defrauding others, but if not I think at least you can let it go, and know that you've done everything for him that might work. Taking all your assumptions: With Roth, you take $6112 from work, (let's call you tax rate 10%) pay $612 in taxes, and contribute $5500 (the max if you are younger than 50).  This $5500 will grow to $21,283 in 20 years at 7% annual growth ($5500*(1.07^20)), and you will pay no additional taxes on it. With the traditional IRA, you take $6112 from work, pay $612 in taxes, and contribute $5500.  You will receive a tax deduction at tax time of $612 for the contribution.  This money will also grow to $21,283.  This will be taxed at your ordinary income rate (which we're calling 10%), costing you $2123 at the time of withdrawal.  You will have $19,155 left over. EDIT: If you invest your tax savings from every contribution to the Traditional IRA, then the numbers wash out.  Perhaps a pivotal question is whether you believe you will have greater taxable earnings from your investments in retirement than you have in taxable earnings today -- affecting the rate at which you are taxed. You might want to consider how much effort mitigating this risk is worth. For example, having homeowner's insurance and sufficient documentation of your valuables is probably enough to satisfy your fears if they are based on simply losing your property.  In the end is there really any benefit in living like you don't have money in an effort to keep people stealing it from you? That said, One piece of good advice I have heard for how to avoid encouraging robbers is to avoid putting boxes for expensive items (e.g. electronics) out by the trash until the morning they pick it up. No need to advertise that you just bought a super expensive home-theater system.