Navigating Investment Risks: 4 Tips to Avoid Scams in the Midst of Rising Investment Engagement Among American Youths

Gen Z'ers and Millennials are not necessarily who come to mind when we consider high investment traction, but as the research reveals, the younger generations are comparatively more investment savvy than previous generations were at their age. According to a 2022 Financial Literacy Survey by Investopedia, Gen Z adults between 18 and 25 are far more interested in investment than older generations were at their age. However, the survey admitted that these young people also have the most to learn.

A closer look at the survey reveals a few other salient points: Young Americans have high enthusiasm for investments, with about 46% signifying interest in trading the financial markets or investing themselves. The current state of activity in the stock market also tilts surprisingly toward the younger generations, with 63% and 69% of Gen Z and Millennial investors, respectively, holding long-term investments in individual stocks.

Clearly, young people are hopping on the bus in their numbers, but sadly, with this trend has come a rise in investment scams, from Ponzi schemes, pyramid schemes, pump and dump schemes, high-yield investment programs, binary options scams, and the likes. Young investors who believe they can make a living, or at least build a long-term portfolio, with the financial and stock markets seem to be a major target of scammers. This article covers a few strategies for identifying scams and ensuring enthusiastic investors can safeguard their investments.

Look Behind the Curtain

Most investment schemes lead with the "what you stand to gain" section. While a lot of effort is put into breaking down the supposed upsides of the investment, there is rarely enough time given to explain the risks. This is why aspiring and young investors should seek counsel while making investment decisions. Investors require some investigative nous to succeed, which was highlighted in the "Flora Growth Gate" of 2021.

In 2021, a Canadian cannabis producer named Flora Growth began to make waves as their stocks rose more than 500% in a month, stirring enthusiasm and heavy investment. However, veteran trader David Capablanca raised an early alarm that alerted many people to the apparent dangers of the investment. As it turned out, David had spotted some glaring red flags with the investment, earning him a name in the investment world as a critical mind and trusted mentor.

David Capablanca co-founded Conscious Trading Academy, which educates traders on the art of trading and mindset. He is also the host of The Friendly Bear Podcast, a podcast that shares insights on everything regarding short selling. He elaborates on his investment approach and why he saw fit to raise the alarm in 2021. While summarizing the import of developing an investigative mindset to investment decisions, David states:

"The investment opportunity that Flora Growth presented at the time was very interesting to me as I was receiving texts from paid pump and dump outlets, so that prompted me to have a look. There were discrepancies in the company's SEC filings. In their addresses, there were also questionable personnel in their filings that had relations to pump and dump schemes, which was why I raised the initial alarm. Investors must be extremely careful where they put their funds. The goal of investments might be money making, but if young investors want to be successful in the long term, they have to consider way more metrics than the possible profit margin."

Consider The Risk-To-Reward Ratio

According to SurveyMonkey, 16% and 12% of Gen Z and Millennial investors are actively involved in day trading as opposed to 7% and below of all other generations. This stat suggests that young investors favor a quick turnaround of investment and higher short-term returns. While this is certainly attainable in the financial and stock markets, it is not a good psychological approach to investment.

Investing always involves a trade-off between risk and return. When investing money, investors must consider the balance between how much risk they take and how much profit they might make. Ideally, investment offers that guarantee huge profits without significant risk are already a red flag. As simple as this principle might seem, many people still fall for the daily unrealistic promises bandaged around social media.

Mr. Capablanca states, "Investing involves a very high percentage of psychological acuity. The majority of people who fall into scams lack the basic psychological makeup of a successful trader or investor. As investors, the bulk of the job is to weigh the odds, devour all available knowledge, and make decisions. Granted, investments will always be a risk, but at least we can take informed risks."

Avoid Aggressive Pressure and Urgency Tactics

Legitimate investment opportunities don't come with a quick deadline. Be cautious if you feel rushed, pushed, or told that you need to act fast because the "chance" won't last. Scammers often try to make people decide quickly, taking advantage of the fear of missing out.

Listen to your gut feelings. If you sense excessive pressure, there's likely something wrong. Scammers often use forceful methods, highlighting limited-time deals or creating fear. Trustworthy investment experts will give you the freedom and time to think about an opportunity.

Look Out for Evasive Tactics

The smart play when making investments is to reach out to the companies where possible and discuss further to understand the implications of your investments. As part of 'looking behind the curtain,' investors must do their due diligence to ascertain that their investments are safe.

Mr. Capablanca says, "A trustworthy company will always be open to more discussions, especially if you're thinking about investing your money with them. If a company or its representative avoids providing clear information or makes it hard for you to reach them again, it suggests they might not be genuine. Genuine businesses value open communication with potential clients."

Most financial experts believe that the best approach to reducing investment scams is to go after the perpetrators and educate investors and traders on how to avoid them. It is better to attack from both fronts and render these scams dead on arrival.