5 Red Flags Every Investor Must Avoid

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September 19, 2014 by Bill Johnson


social-network-icons-psd-150x150The Internet and new technologies have made way for all types of new investment opportunities, but not every investment proves to be a good one. Scams, investment fraud, and unsuccessful startups are the bane of any investor’s existence, which is why it’s important to be able to identify any problems that may exist in an investment opportunity. After all, your goal is to make money, not lose it.

The following is a list of five red flags that every investor should look for (and avoid) when deciding what to invest in next.

1. If It Sounds Too Good To Be True, It Just Might Be

Lots of people get sucked into investments that are, plain and simple, too good to be true. Businesses that promise hefty returns in a short timeframe (anything less than three years) are usually extremely naïve, or just flat out lying. Either way, you’re likely to lose money in this scenario, so make sure that you take a detailed look at their business, marketing, and growth strategies and think critically about whether or not their numbers are realistic or too lofty to achieve. If you feel like their goals aren’t feasible, then you should either wait to invest until they’re realistic or look for another opportunity elsewhere.

2. Offers from Complete Strangers

People who offer up unsolicited “investment” opportunities have nothing to lose, but the same cannot be said for the investor. Unsolicited investment offers are scams almost 100% of the time. Any offer that comes to you from someone that you don’t already know should be avoided no matter how promising it looks or sounds.

3. Promised Returns of Any Sort

The simple fact of the business world is that you cannot guarantee profits from one section or another. A business that’s willing to guarantee returns is probably looking for any investor that seems remotely interested, and you shouldn’t invest your money into those sorts of companies. Most scam artists promise guaranteed returns to get someone on their proverbial fishing line—if you ignore the bait, you will probably also avoid being caught in a bad investment.

4. Any Sort of Buying Pressure

A pushy salesperson is never a good sign. If someone is pressuring you to invest, chances are there’s something going wrong and they’re looking for someone’s money to help them fix it. Needless to say, a situation like this is unlikely to yield a positive return.

Businesses that are on the decline will try to convince you to invest your money before you can figure out what is going, and if you fall into their trap, you’re going to end up losing money. Startups should be trying to impress you and win you over as an investor, not strong arm you into giving them money. As an investor, it’s important to always remember that you have the upper hand and to not settle or be pushed into anything that’s less than perfect.

5. Lack of a Paper Trail

Before signing a contract, you should ask the startup for financial statements or other types of documentation that better defines their business, its progress, and its projected growth. If there’s no paper trail or documentation, it’s likely that the business is either highly unorganized or a scam—without documentation, they’re less likely to be caught. Investing is an important and risky decision, so don’t be afraid to ask your clients to show you their paperwork; legitimate businesses will happily oblige!

In today’s Internet world it can be hard to differentiate a great investment opportunity from a poor one, or even one that’s a scam. But, if you pay attention to these five warning signs, you should be able to handpick businesses that will reward you handsomely rather than the ones that will take your money and run.

Read more: 5 Red Flags Every Investor Must Avoid

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