According to industry analysts, the foreign exchange market is said to be growing at almost 25% per year, and the sector of individual investors is growing at a stronger pace than the institutional sector.
As this market continues to grow, so do the number of less-than-reputable schemes associated with it. Just a few months ago, a probe into the biggest foreign exchange scam in U.S. history concluded with a $33 million dollar fine. The fine went to a man who solicited millions of dollars from unsuspecting investors to fund purchases of 22 luxury cars, eight homes and extravagant entertainment.
In this particular case, our less-than-reputable-party started offering off-exchange forex options and futures contracts and soliciting customers in 1998. In the process of doing so, this party grossly misrepresented the profits and risks involved in forex trading. Adding insult to injury, the funds were never invested; rather they were used to pay for personal expenses such as homes, cars and boats. In order to avoid detection, the guilty party provided customers with false account statements and posted false information on its Web site regarding the trading profits, market conditions and opportunities, the balances in each investor’s account, and the reason for delays in paying customer withdrawals.
Most less-than-reputable schemes have some telltale properties and can be identified by experienced traders. However newer speculators may have problems spotting the difference between what is legitimate and what isn’t. I would strongly recommend thoroughly researching any potential companies you may be thinking about investing with before sending in your hard-earned cash. I am constantly surprised how people will send checks off to companies that promise the moon without doing even the smallest bit of due diligence. These are rational people who research their purchases thoroughly, read consumer reports and weigh their options carefully about things such as schools, homes and even banks; and yet somehow are blinded by the promise of easy riches. So, if you take nothing else away from this, take away the need to do your due diligence on any company to whom you are sending your investment dollars. The last thing you need is to find out that the company you have invested with is under investigation for fraud. In this type of circumstance, it can often be impossible to retrieve your money.
So, how do you know if you have encountered a less-than-reputable deal?
Here are a few tell tale signs that may help you spot this kind of shady deal before you invest:
Stay away from opportunities that sound too good to be true. Red flags must be raised when a firm guarantees large profits. First of all, most regulatory bodies do not allow guarantees. They require that all registered and regulated companies provide balanced statements, which means any statement implying gains must be balanced by statements of risk. Over inflated guarantees and statements of gain are merely ploys to entice investors and make them believe their money is safe and that they will definitely make huge returns. It is important to note that even the best professional traders cannot and do not guarantee they will make a profit on any given day. The forex market is the most unpredictable of all the financial markets. So be suspicious of such claims and those who make them.
Stay away from companies that promise little or no financial risk. If you encounter any firm that claims to have developed a foreign currency trading strategy that carries little or no risk, run away at top speed with your checkbook firmly in hand. The reason that forex trading can be very profitable is because it also carries a very high risk of loss. The forex market is very volatile, and even with good money management, an investor can lose most, if not more than the entire account, in a very short amount of time.
Get the company’s performance record. Before you give money to a forex company, make sure you check them out. Verify that they are registered with the United States Commodity Futures Trading Commission, www.cftc.gov, or the National Futures Association, www.nfa.futures.org. Many disreputable companies falsely claim that their firms are registered with the CFTC or the NFA to gain a prospective investor’s trust. Or in some cases, they claim they have been approved by the NFA or CFTC. This is a big red flag. The NFA and the CFTC will never “approve” of a company. They must be registered. Other sources of helpful information may also include your state’s securities commission, attorney general and the Better Business Bureau.
Stay away from employment ads for forex traders. Many less-than-reputable schemes use employment ads to attract individuals with capital to trade using their systems. The ads, which often appear in newspapers and on the Internet, state that a foreign currency firm is looking for individuals to teach how to trade the foreign currency market using the firm’s capital. Those who reply to the ad are typically convinced by the firm that they will make a fortune trading currencies if they participate in the firm’s trading program. During the training process, which often occurs on a demo system, the novice traders are encouraged and told that their demo trading records show significant profits, that they are ready to make real money and would be very successful. Despite the firm’s assessment of the novice trader as a brilliant newcomer, no firm capital is provided to the trader, instead the excited novice is told to use their own capital to trade using the firm’s platform.
Stay away from firms that pressure you to trade today. Investment scams usually use some compelling reason why it is essential for you to invest right now. Perhaps because the investment opportunity can be offered to only a limited number of people, or because delaying the investment could mean missing out on a large profit; after all, once the information they have confided to you becomes generally known, the price is sure to go up, right? Urgency is important to a swindler. For one thing, he or she wants your money as quickly as possible with a minimum of effort on their part. And they do not want you to have time to think it over or discuss it with someone who might suggest you become suspicious or check the proposal out with a regulatory agency. Besides, he may not plan on remaining in town very long. Please remember, the market will be here tomorrow, in six months and even next year.
I hope these five tips help you spot the wolves in sheep’s clothing. By working together, we can make smart investment decisions that will lead to successful trading.
Marilyn McDonald
Director of Marketing
Interbank FX
marilyn@interbankfx.com
www.interbankfx.com
