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High Yield Investment Fraud Schemes – How they Work, How to Avoid Them

Investing carries some obvious risks, and everyone who enters the investment world is obviously aware of that fact.  But for many, falling into the trap of high yield investment fraud schemes is easier than they likely realize and can lead to the loss of hundreds, thousands, and even millions.  While these schemes – usually called Ponzi schemes – always eventually collapse upon themselves in one way or another, it’s important to recognize how they work so that you can better prepare yourself to avoid them.  One bad investment could cause your portfolio to take a hit you’re unlikely to easily recover from.

Most high yield investment fraud schemes draw in victims through that promise of high yields.  Essentially, they promise returns that are much higher than other investments offer.  In some cases these sound too good to be true, but some investors simply ignore their gut instincts and believe the promises.  That’s often because a good scheme runner will be able to show some very convincing figures to go along with their phony, unregistered securities.  If you’re being offered high returns on investments, there’s certainly a chance that it’s legit.  But be sure you take a closer look before you hand over your money.

Basically, high yield investment fraud schemes work because they actually are able to repay investors for a period of time.  But they actually pay dividends to early investors using either their own money or the money given to them by later investors.  In some cases, those same early investors are actually convinced to reinvest in the scheme, thereby keeping the scheme running for an even longer period of time.  It’s a house of cards that usually collapses on itself within a matter of years or even months as more payouts are requested and the funds to make them are depleted.

Authorities usually latch onto high yield investment fraud schemes fairly quickly as well, mainly due to the fact that the unregistered securities are fairly easy to spot.  But within that short window of time, investors have lost fortunes and been reduced to pennies.  The best example of this is Bernie Madoff, but obviously many other conmen have run these same schemes throughout history.  Your best defense against high yield investment fraud schemes is diligence and research.  Find out as much as you can about an investment before you commit to it.  It’s a good all-around investment strategy anyway, and one that you should certainly keep in mind to protect yourself.

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FOREX – A Closer Look

If you’re thinking of moving beyond basic investing in various companies listed on the NASDAQ or New York Stock Exchange, then one option you may want to consider is FOREX, or the Foreign Exchange Market.  Also called FX or just the currency market, FOREX is essentially a financial market used to trade currencies on a worldwide scale.  It’s vital for a wide range of different applications including global business endeavors like trading goods and commodities since it helps to facilitate the application of exchange rates throughout the world.  A company in America can import goods from foreign countries and pay them in their own form of currency.

There are numerous things that set FOREX apart from virtually any other market on the planet.  The most obvious is the fact that it is up and running twenty four hours a day except over weekends.  It also represents the largest asset class in the world and can utilize various forms of leverage to directly influence profit loss or gain.  Also, numerous different factors help contribute to its exchange rates.  All of these factors have helped it become known as the market that comes closest to perfect competition.  Daily turnover is over 3.8 trillion dollars, a figure that is absolutely astounding.

As for just what countries rely the most on FOREX, it shouldn’t be a surprise that America tops the list with over eighty four percent of the daily share being comprised of the dollar.  The Euro follows that with just under forty percent, followed by the Yen.  On the FOREX, currencies themselves can actually be traded as well and many currency investors rely on the market to make their investments.  However, unlike localized markets, this market is more influenced by a wide array of different factors, and careful research is needed to ensure that your moves are smart.

The economic factors occurring in individual countries is a major factor in most currency rates and in transactions made on the FOREX, but that isn’t all.  Political issues can also have a profound impact, and unrest or turmoil as well as transition to a new governing body can all slightly or drastically affect exchange rates.  Learning more about FOREX is a good idea, especially if you’re involved with international trading and investing.  But it can be a very complicated and volatile market, and due diligence needs to be utilized whenever you make any moves within its confines.

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Dow Theory – The Main Tenants

Essentially, Dow Theory is nothing more than a method of technical analysis applied to stock price movement.  It’s often used as a study of stock trends, and has a long history of being used to help determine when the right time to buy or sell stocks is.  It’s not used as much as it once was, but Dow Theory is still well worth understand since it can help you learn how market trends affect your portfolio and your trades.  There are a few basic tenets on which this theory is built, and understanding them is really the key to understanding the entire process.

Dow Theory watches three basic types of movements in the market.  These include movements that focus on short, medium, and long term movements.  These movements can happen simultaneously or separately, but are the foundation of Dow Theory. Another tenant is that the stock market and its trends will quickly be affected by news – as soon as news related to any stocks is released the price of stocks will change to reflect that news.  This is also a basic tenant of efficient market hypothesis, and one that you can’t overlook if you’re investing.  Keeping an eye on new developments is vital.

Also, market movements occur in three basic phases according to the Dow Theory.  The first phase, known as the accumulation phase, occurs when investors who are ‘in the know’ – those with inside information – are making trades based on their knowledge.  The next phase is known as the public participation phase.  This is when other general traders notice the movements being made by the inside investors, and when this occurs the market prices will shift quickly to reflect the new trend.  At this point the third phase, known as the distribution phase, will occur.  This is when those original investors begin to distribute their shares among the public market, often for serious profits.

The final tenants of Dow Theory include additional info on the overall trends in the market.  First, market averages have to confirm one another.  The central rules behind this tenant applied mainly to the 20s, when Dow Theory was introduced.  Additionally, according to this theory trends are usually confirmed by volume, and they exist until various signals prove that they’ve reached their end.  While many people consider this theory archaic and outdated, some of the basic principles are still very much valid in today’s economy.  Take a closer look at Dow and you may find some tips for investing.

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Credit Risk – Knowing the Basics

There are plenty of different types of risk in the financial world, from portfolio risk to liquidity risk.  One of the most important to understand risks is known as credit risk.  There are actually several different types of credit risk out there, and it will have a major impact on nearly all aspect of finances, from basic credit card applications all the way up to major mergers.  Investors and creditors alike need to understand the basics behind this form of risk, especially since it is such a major influence on so many different parts of doing business in the financial world today.

Basically, credit risk refers to the chance of an investor losing funds loaned to a borrower due to default on payment.  It’s often known as default risk for just that reason.  Not only will an investor lose their principal investment amount, they’ll also lose interest funds and may have to pay collection costs in an effort to regain their lost funds.  Most lending groups or investors set up their own credit models that they use for analyzing and assessing credit risk and determine whether or not a loan or investment is worth making.  The most obvious example of this is a credit check used to assess whether or not a customer qualifies for a loan or credit card.

Credit default risk is the most commonly discussed form of credit risk.  This is essentially an assessment made into what the chances are that a customer will repay the loan extended to them.  A number of different factors will be looked at when assessing credit default risk.  Concentration risk is another form worth considering and basically involves a group of risks and whether or not they may trigger losses that are actually large enough to cause serious threats to a bank’s main operations.

If you’re a lender then knowing the amount of credit risk associated with a loan is vital for determining whether or not you can afford to extend the requested funds.  Investors will use this risk similarly to assess things such as bonds or stock investments and whether or not the risk of loss is too great to justify the means.  And even consumers owe it to themselves to understand credit risk since their level of risk will have a major impact on everything from interest rates to principal qualifying amounts.  The basics are easy to grasp but can have very far reaching consequences.

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Bull Market – Taking the Bull by the Horns

Even if you’re only peripherally aware of the stock market and trading, you’ve probably hear the terms bear market or bull market before.  These two descriptions are usually applied to the stock market as a whole, but their use can also be focused on other traded commodities, bonds, currency, or even real estate.  Knowing the basics behind just what a bull market or bear market is will help you not only to understand what investors are talking about when they mention them, but also how you can take advantage of various trends in the market, letting you make smart trading choices accordingly.

A bull market or bear market is basically named by the way that the two animals attack.  A bear swipes its paws downward, while a bull thrusts its horns upward.  In other words, a bear market is one that is trending downwards while a bull market is one that is trending upwards.  These terms can be secular, primary, or secondary.  Secular is used for long term durations, primary for medium terms, and secondary for short.  Knowing the market trends and the forecast can obviously help you choose when is the right time to buy or sell stocks, commodities and other tradable assets.

Taking advantage of an emerging bull market is in any investor’s best interests.  At the start of one, prices on stocks will likely be lower than average.  Buying when you feel that prices are at their lowest just as an upward moving market is starting could lead to big gains.  Of course, spotting a bull market early takes diligence and skill, so you’ll need to learn the various signs that suggest it’s on the way or already occurring.  In many cases, stocks can rise by tens of thousands of points over a period of just a few years.

On the flip side of a bull market is the bear market, and the main issue in these cases is that the actual downward trend sends traders into a panic which only further contributes to the decline. The dot-com bubble burst and the Wall Street Crash are two good examples of this.  Markets are often influenced by a number of factors, one of the main ones of which is investor confidence or fear.  If you’re lucky enough to spot a bull market as it occurs you stand the chance of making serious profit within a short time, so be sure you learn how to take that bull by the horns.

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Asset Liability Management – Financial Insurance

Banks and financial institutions have a lot of fingers in a lot of pies, so to speak.  From loans to securities, both debts and assets need to be managed effectively to ensure the future of the organization.  Asset liability management, while certainly a term that has evolved over the years, is one of the most important facets in the world of finance.  It serves as a kind of financial insurance for financial organizations, and without proper use of it an organization is likely to fail.  It’s a complex process, but one that is vital for success no matter what the size of the institution in question is.

Basically, asset liability management is a method used to balance the risks faced by an institution.  An uneven and unmanageable debt to asset ratio can lead to major problems, and steps have to be taken to avoid it.  Banks face a variety of different risks.  Interest rate risk, liquidity risk, operational risk, and credit risk are just a few of them.  Asset liability management is used to help manage the level of interest rate risk and liquidity risks faced by lending institutions and banks.  It’s often called surplus management, and essentially focuses on ensuring that a good return on investment is earned.

When a company includes good asset liability management it can actually influence the overall returns made and even drive up its stock value.  The processes, whether focused on a bank or a business, involves a series of equations designed to explain just what the risks a company faces are and what level of debt and assets it has.  It’s much like balancing a checkbook, only on a much larger and more complex scale.  Market value, interest rates, and a wide range of other factors help contribute to the overall findings made in asset liability management steps.

Most asset liability management efforts now integrate all types of risk since each of them is closely related to and responsible for influencing each other.  Previous steps often ignored certain risk factors and focused on interest rate risk, but today it’s known that a broad spectrum approach is far more effective and efficient.  It’s certainly not a task that everyone will have to deal with, but there’s no way to overstate the importance of good asset liability management techniques.  They’ll have a profound impact on the financial future and stability of any institution or organization, and as such can’t be ignored in the least.

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Ponzi Schemes – What are Ponzi Schemes?

Ever since the idea of investing money was created there have been dishonest people who are looking to make money off of the innocent trust of others. In the last decade or so, Ponzi schemes have made headlines all over the world for stealing money from unsuspecting investors. The most famous of all the Ponzi schemes is the one perpetrated by Bernie Madoff in 2008 that wound up costing investors over $65 billion from a list of clients that included famous actors and wealthy business people. The Madoff scandal is what brought this kind of crime to the attention of the general public, but dishonest investment companies have been stealing money from people for years in this manner.

Ponzi schemes first got their name from an investor name Charles Ponzi who used the age-old scheme in 1920 to steal millions of dollars from unsuspecting clients. Prior to Charles Ponzi, this kind of crime did not have a name even though records of it happening go all the way back to the mid-1800s. Ponzi schemes started to pick up speed in the 1980’s when cases of scandals all over the world were being reported. But, for some reason, these crimes were never very widely reported. People were losing hundreds of millions of dollars in these elaborate schemes and the world heard very little about it. The lack of attention in the media is one of the reasons these schemes were able to exist for so long. Once Madoff’s crimes made the news, people got smarter.

Ponzi schemes are investment frauds where the only income coming in to the scheme is the money being given up by the clients. The person or firm at the center of the scheme is not investing the clients’ money. Instead, the money is being used as a personal income to the criminals running the scheme. Ponzi schemes usually persist until someone gets suspicious and calls the authorities, or the fake securities being sold by the investment house cause government investors to be suspicious.

It is difficult for inexperienced investors to differentiate Ponzi schemes from legitimate investments. One sure way to determine Ponzi schemes if the rate of return on an investment seems to remain consistent for an unusually long period of time. Real investments gain and lose money on a regular basis, a scheme gives returns that do not vary much and are always gains. Most people are not clued in that it is a scam because they keep getting official looking statements. It is not until they try to get their money back that they learn the truth.

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Merger Negotiations – What to Monitor During Merger Negotiations

Investors are always interested to see what goes on during merger negotiations between two companies. If it is between two struggling companies, then investors want to know what the companies are going to change to make one profitable organization. If the merger negotiations are going on between a successful company and a struggling company, then a long list of questions about why the merger is taking place usually starts to form. There are several things to watch when two companies decide to merge that can help determine if the new company will be successful, or if the new company will fall flat on its face.

One of the details of doing business that people sometimes forget about is an efficient billing platform. Good merger negotiations develop ways to create a cohesive billing system that will allow the new company to maintain contact with both sets of customers. But merger negotiations that leave out a discussion of the integration of two different billing platforms can be a recipe for disaster. For a company to generate revenue, it needs to develop an efficient billing platform. When two companies come together, developing a single billing platform can be tricky and needs a lot of planning.

The executive team that will run the new company is always at the center of merger negotiations from the very beginning. Investors watch these parts of the merger negotiations with significant interest because the new executive team will determine the success or failure of the new company. Watch for any new executives that are being brought in during a merger. Sometimes new blood can be helpful in strengthening a company, but new executives in a merger can sometimes lack the experience to make the process smooth.

Merger negotiations are started for a variety of reasons. In some cases, a successful company finds something it needs to be even more successful in a company that is struggling. Rather than buying the company, the two companies decide to merge. Both companies need to bring benefits to merger negotiations for the negotiations to be successful. Investors need to see what both sides bring to the table to try and get an idea of how successful the new company will be and to determine what value the new company will have to offer. A smart merger can create a profitable company that would be worth putting money into. But an ill-conceived merger could kill both companies and take your investment with them.

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Junk Bonds – Risking Your Money with Junk Bonds

Junk bonds get a bad rap because of their name and the reputation they developed thanks to unscrupulous investors like Ivan Boesky in the 1980’s. While junk bonds are not exactly the safest investments you will ever make, they are still a legal and legitimate way for a company to raise money. Before you jump into the world of buying junk, you need to take some time to understand the meaning of the phrase and why it has developed such a bad rap over the years. In some cases, these kinds of bonds make for some of the best investments available. In other cases, the risk is so high that the promise of a great return may not even be worth the potential loss.

Junk bonds are bonds issued by companies with a B credit rating or lower. Companies that have never issued a bond before and have bad credit are forced to issue junk bonds. The benefit to the investor is that these kinds of bonds usually carry a return rate that can exceed standard government bond returns by as much as six to eight percent. But if the company issuing the bond has a credit rating of C or D, then the risk for investing in a company like this is incredibly high. Then there are companies which are referred to as fallen angels. These are companies that had high credit ratings but then go knocked down to junk status. In many ways, the fallen angels present some of the most tempting bond offers available.

A fallen angel is tempting because there is that feeling that the company was just having a bad stretch and that better times are ahead. But when a company that used to offer solid securities is forced to offer junk bonds, it says something about the company that you do not want to ignore. You will want to do some serious research on fallen angels offering junk bonds before you make your investment. Find out what management changes have been made since the company’s collapse and become very familiar with the methods that the company intends to use to bring value back to its credit rating. If you assume the risk without doing the research then you could be out all of your initial investment.

Because junk bonds are so risky, they are usually left to wealthier investors and organizations that can afford to speculate. Junk bonds can sometimes yield double-digit returns that would make an investor a considerable profit. But they can also cost you everything if you don’t do your research first.

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Investing in Utilities – The Rapid Changes in the Utilities Markets

With the rapid pace of change that is going on with public and private utilities, investing in utilities has become somewhat of a risk. One of the biggest challenges facing anyone investing in utilities is the unpredictable rising costs of supplying utilities to customers. One of the best demonstrations of these cost changes is in the telecommunication industry. In the span of 10 to 15 years, the telecommunication industry has gone from copper wire, to fiber optic and then to wireless. It costs a significant amount of money to transition a communication network from copper to fiber optic and then there are further complications when you try to bring wireless networking to residential and commercial clients. These changes have sparked price increases which have created a market share battle among telecommunications companies.

There used to be a feeling that each area had one phone company, one gas company and one cable television company. Back in those days, investing in utilities was not nearly as complicated as it used to be. But new laws and regulations have force changes that have created competition in nearly every aspect of the utilities industry. Now investing in utilities requires a significant amount of research and understanding before you put your money anywhere. The complications are compounded when you have several utilities companies trying to sell services on one distribution network. All of those electric companies trying to sign up customers are using the one electrical distribution network that is in place. It is confusing to the customers and to the investors.

With the federal government investing in utilities and the strengthening of the American infrastructure, it brings in a whole new level of issues. Investing in utilities will now require an understanding of alternative energy and how that alternative energy is best delivered. The rebuilding of the American infrastructure can be a significant investment opportunity. But it can only make money for the investors that understand the potential of coming changes and know where to place their funds.

If you are going to be investing in utilities, then you will need to hire a few full-time utilities experts to keep a watch on the changes happening in the industry. Investing in utilities can be money well spent, but only if you are able to understand the trends that are starting to shape the future of utilities in the United States and around the entire world.

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