Avoiding Disastrous Investments

In the wake of disasters, come cleanup and rebuilding efforts and, unfortunately, financial scams.

Don't let one disaster lead to another -- the second will hit your wallet.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority recently warned investors to beware of potential scams that exploit the BP oil spill and related cleanup efforts.

With eye-popping estimates for the cost of cleanup, investing in a company that promises to play a role in the remediation efforts in the Gulf might seem like a sure thing. But do your homework and use common sense before you empty out your money market account or cash in a certificate of deposit to invest.

"While some of the companies touting their role in the cleanup may be legitimate, others could be bogus operations that are only looking to clean out unsuspecting investors," FINRA and the SEC said in a joint statement.

The same warning can be applied after any disaster. The SEC saw large numbers of investment scams following Gulf Coast-hurricanes in recent years, for instance, with scoundrels promising unbelievably high rates of returns for investments in companies that supposedly would profit from rebuilding efforts.

Follow these six tips from the SEC and FINRA to avoid trouble:

1. Spot suspicious claims.

Some companies circulate messages through e-mail spam and unsolicited faxes or issue press releases. FINRA and the SEC said these statements might include claims of special products or technology effective in restoring the ecosystem and contracts with British Petroleum for the cleanup effort. The companies might also claim to provide expertise to BP or government agencies. In their pitch, companies may predict exponential sales growth and pressure you to invest right away.

2. Don't believe everything you read.

Don't rely on any information in a text, tweet, e-mail, fax, blog post or online thread. A growing number of investors share information through online bulletin boards, reading through numerous messages in threads to find stock tips. Some of the information might be true, but some of it's phony. Scammers hide behind numerous aliases to promote companies and pretend to reveal inside information.

You have to know who you're dealing with to judge whether the information is worth considering, and once you know that, question further to see if that outfit is getting paid to tout the investment opportunity. Read the fine print of any reports.

3. Learn where the stock is traded.

Most stocks recommended through spam and unsolicited faxes don't meet listing requirements for the major stock exchanges. Rather, they're quoted on the OTC Bulletin Board and Pink Sheets, which don't have the same quality standards the big boards do, says the SEC. In additio,n most stocks listed there are traded very infrequently, so end up having trouble getting your money back out after you invest.

4. Research the company.

Get financial statements from the company, verify claims about contracts by calling suppliers or supposed customers, and check out the backgrounds of the people running the outfit.

Most public companies file quarterly and annual reports with the SEC. Go to the SEC's online EDGAR database to check. Read the reports thoroughly to learn about the company. Keep in mind that filing an SEC report doesn't mean a company is worth your investment dollars.

6. Be wary.

Don't assume a company is legitimate just because it has slick brochures and a nifty Web site. Question any pitch that promises a quick pay-off, especially if the outfit is a startup firm or its product is still in development.

Even with bank rates at ultra-low levels, your money is better off in a certificate of deposit or money market account than risked on a "sure thing" investment that's bound to go sour.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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