The modern economic system develops incredibly rapidly. The money environment becomes more intricate, leading to an increased demand for quality investment opportunities with high yields. Some of the classic investment tools that we were accustomed to just a few years ago have lost their relevance in today’s economic climate. It is not surprising that new instruments capable of competing with the classics appeared on the financial market.
More than 20 percent of the returns generated by peer-to-peer lending companies come from loan defaults, far more than what is typically seen in other investment classes. This makes it difficult for investors to accurately price this asset class and understand the actual risks involved. Additionally, there is no clear legal recourse against lenders at peer-to-peer lending companies, so many lenders may not insist on being repaid after a default occurs and also popular high-yield investments have a specific irresistible attraction.
They promise high returns and can be difficult to resist for three reasons:
1) People tend to be influenced by the fact that others have been earning good returns from these types of investments, so they think it must be easy to do on their own.
2) The advertisements are persuasive because they often show projections of very lucrative gains far into the future. In addition, advertising tends to emphasize “the rate of return.” This means that investment promoters focus only on the current expected annual rate of return and don’t tell you about possible downside potential or total loss.
3) Promoters sometimes use scientific-sounding language in their descriptions of an investment idea. For example, an investment may have some resemblance to a more familiar financial concept. Promoters often use the term “capital appreciation” for what is stock market speculation or “yield” for what really should be called return on investment.
You can avoid being misled by these three pitfalls if you remember that high-yield investments are speculative–which means the possibility of losing part or all your money is relatively high. If something sounds too good to be true, it probably is. Our booklet entitled High-Yield Investments: Are They Safe? will help you better understand this subject and give you tips to recognize safe investments from those that are not safe. To receive a copy, write us at the address below and include a self-addressed, stamped envelope.
These scams entice consumers into purchasing shares of private business ventures that seem legitimate but later turn out to be scams. The company may require investors to buy an initial investment and additional shares at the latest timetables. When the scheduled date for these secondary transactions happens, consumers receive a call from a sales representative who urges them to buy more of the company’s stock as soon as possible because another investor is trying to purchase all of it first. Consumers then transfer large sums of money into the company’s bank account to meet the deadline and avoid losing their investments.
