Whether you’re a first-time investor or have been investing for many years, there are some fundamental questions you should always ask before investing your hard-earned money.
Ask Before Investing, Is the seller licensed?
Con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Smart investors check the background of anyone promoting an investment opportunity, even before learning about opportunity itself.
- Researching brokers: Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.
- Researching investment advisers: The Investment Adviser Public Disclosure website provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms.
- Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.
Ask Before Investing, Is the investment registered?
Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database
Ask Before Investing, How do the risks compare with the potential rewards?
The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.
Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds.
Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities.
Do you understand the investment?
Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.
Where can you turn for help?
Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ websites.