The risks of using social media to make your investment decisions

If you are not investing in this new business online, then you are missing out! This is the slogan frequently used by Nigerians when trying to convince their friends to join an investment scheme they discovered via social media.

Lots of investment schemes are advertised on social media. You might want to jump on every opportunity to make quick cash without conducting proper research on the business. 

The investment guru, Warren Buffet stated that you should never invest in something you don’t understand. The Fear of Missing Out (FOMO), is a real struggle for investors as it causes you to make decisions due to emotions, rather than logic. You invest in a scheme because it’s trending and you don’t want to miss out on it.

Everybody has different investment goals, so you shouldn’t be swayed into making an investment decision that won’t match your goal. We would highlight and discuss the risks involved when you make investment decisions, solely because of social media. 

You could fall for a Ponzi Scheme

This is an investment scam that offers you a high rate of return with little risk. In a Ponzi scheme, the older investors are paid from the capital brought in by newer investors. It’s a ‘rob Peter to pay Paul’ scheme. Ponzi schemes neglect legitimate strategies to run the business instead, they focus on making money off new investors’ capital. 

A popular Ponzi Scheme that defrauded Nigerians of millions of naira was Mavrodi Mundial Moneybox (MMM). This scheme involved you rendering ‘help’ to people by investing a sum of money, and you get ‘helped’ as well by getting a return of 30% on your investment after 30 days. Many Nigerians pumped money into the MMM scheme despite warnings from SEC only for it to crash after a while. 

Ponzi scheme organizers make use of social media to advertise their schemes, hence making them popular. When such schemes start trending, you are likely to hear of them and invest due to FOMO. 

You may fall for a Pump and Dump Scheme 

A Pump and Dump scheme is an investment strategy to deceive you to purchase stocks whose prices have been artificially inflated. Pump and Dump fraudsters target thinly traded stocks of unknown companies to carry out their agenda.

The fraudsters create a robust financial statement of the company, painting it as a profitable venture. Then the news of the booming company is spread on social media thus, creating the needed awareness for the company’s stock. 

Analysts and individuals, are paid to promote the company’s stock all over social media and advise you to buy the stock due to the high returns offered.

The trending stock attracts investors as everyone wants to cash in on the opportunity. The increase in demand for that stock causes the price to rise, which deceives you the more. 

At the peak of the hype, the scammers suddenly sell all of their shares at the current high market price. The volume of shares these scammers hold is so significant that once they sell their holdings, it causes the price to drop. 

Investors begin to panic and sell off their shares, thus causing the price to dip even further, till you are left with worthless shares and huge losses. 

You might be an accomplice to Money Laundering 

Money Laundering is the process of acquiring money illegally and passing it through placement, layering & integration so it comes out clean looking like legitimate money.  They now search for accomplices on social media 

A money launderer could suggest he sends money to you (placement), and you help him buy shares in your name, and then you later sell them to his crony he will introduce to you. This part of money laundering is called ‘layering’. He may offer to pay you a fee for this activity and you might be an accomplice to money laundering without even knowing. 

Pig Butchering Scams 

The pig butchering scam deceives you into thinking that you have found love, instead, your supposed lover ends up defrauding you. The scammers join love and dating sites, to prey on singles looking for love. 

He presents himself as a young, attractive, and rich single ready to mingle and find love. He finds you interesting and wants to know more about you. 

Then he declares his love interest to you and keeps in communication sometimes for months before he introduces you to join an investment scheme that yields high returns. He doesn’t ask you to pay him but directs you to a fake website to make a payment. 

He can even offer to pay a percentage of the capital for you. The fake website is controlled by the scammer but he makes it look like a third party.

The scammer pressures you to make payment and once that’s complete, your investment gets stuck or declines in value. The scammer claims his investment is affected as well and encourages you to add more funds so that you can withdraw successfully.

Once the scammer exploits you to his satisfaction, he starts an argument and eventually blocks you. 

Fake Celebrity Endorsement 

Scammers use the names and images of influential individuals without their consent to promote their investment schemes. They mislead you to think that celebrities endorse such investment, enticing you to invest as well. 

Scammers advertise the investment on social media using a celebrity’s image without their approval. They promise a high rate of return with low risks.

For example, when Davido raised N250m via crowdfunding for his birthday and said he was giving it away to orphanages, scammers began to take advantage. They sent messages via social media containing links to people urging them to click on the link to win free data and recharge cards from Davido as part of his birthday giveaway. 

Anyone who clicked on the link was redirected to a website for them to input their phone numbers & personal details, which would be used by the scammer for nefarious reasons. 

The same format can be used for investment scams like Ponzi schemes, where scammers misquote a celebrity and build an investment scam around them. Sometimes the celebrity might endorse the scam without knowing it is a scam, like when Nigerian celebrities promoted a Ponzi scheme called ‘Racksterli’ without knowing it was a scam. 

Forex Scams

Social media is crawling with forex scams because social media makes it cheap to reach a larger audience. Nigerians are targeted by forex scams because retail forex trading in Nigeria is not regulated by SEC, so it can be tedious when you are trying to verify the legitimacy of a forex broker. 

Online forex trading is not regulated in Nigeria by the SEC. In Africa, forex trading is regulated in South Africa & Kenya. There are a few online forex brokers that operate in Nigeria that are regulated by the FSCA & other Top-tier regulators and are considered safe for trading for traders in Africa. But most of the brokers are promoting illegally in Nigeria without any license from any Top-tier brokers. 

The absence of regulation means Nigerians sign with forex brokers from other countries, and so scammers from all over the world now target unregulated markets like Nigeria. 

Most scam brokers either have no license to operate or have licenses from lower-tier country regulators like the Bahamas, St. Vincent & Grenadines Island, etc. and these regulators are not efficient.

So-called forex gurus also paint a rosy picture of forex trading on social media, with flashy cars and lifestyles thus creating cult-like followership. Once you register with them, you may not get your money back again. 

How to Spot an Investment Scam

• It is usually unregulated: Investment Scams are not regulated by the SEC. This is because the investment can’t meet the requirements of the regulatory body. Asides from that, the SEC can issue a statement to the public exposing the scam. 

• High returns and low risk: The rule of thumb for investment is low risk, low returns, and high risk, high returns. A ‘normal’ investment with high risks compensates you with higher returns. If you are promised high returns with low risks involved, that investment is most likely a scam.

• The steady round figure returns: A business can make a profit today and suffer a loss tomorrow. There’s no guarantee of winning all the time. Also, the returns shouldn’t be an exact figure all the time it should fluctuate at least in decimals. 

• Free for all: You should be sceptical about any investment that is open to all. Investing requires you to have a sustainable level of income. 

• Pressure to invest urgently: If you are pressured to invest in a scheme, it’s most likely a scam. Scammers apply pressure on you so you won’t have enough time to investigate and find out that the investment is fake. They are only after your money.

• Difficulty withdrawing cash: If the withdrawal process is tightened or you don’t receive your cash as when due, this is a red flag. Any investment that encourages you to reinvest your profit and offers you higher returns for doing so is a scam. 

The Bottom Line

No doubt, investing is the true way to generate wealth. However, not all investments are meant for you. You should not be in a hurry to pump money into an investment just because you saw it online. Carry out thorough research and check out for red flags before you invest.