Learn How to Spot and Avoid China Stock Scams

The Financial Industry Regulatory Authority (FINRA) has issued a warning to investors regarding so-called “China” stocks. According to FINRA’s warning, some of the companies that have been advertising China stocks have no real connection to the country’s stock markets.

While there are legitimate opportunities connected with the Chinese stock markets, there are also a lot of investment scams. If you have received a solicitation via fax, email or text message, you need to beware. Some of these advertisements may place urgency on purchasing large amounts of China stocks. Scam artists will use this tactic to inflate the price of the stock and will then sell off their shares. Investors are then left with a stock valued far below the original price.

Signs That It Could Be an Investment Scam

FINRA outlined the common characteristics of China stock schemes, which include:

  • Pressure to invest right away
  • Using headlines from respected financial news sources, which may be taken out of context
  • Making predictions of tremendous growth
  • Claiming that it is easy to make profits in China
  • Statements that tie the growth of the advertised company with the success of other, unrelated Chinese companies
  • Explanation of how certain actions by the Chinese government will create demand

How to Avoid Becoming a Victim of Investment Fraud

Before making any type of investment, you need to do your due diligence. You can check out the company on the Securities and Exchange Commission’s (SEC) EDGAR database. If the company is registered and trades with the SEC, you should analyze the reports carefully and verify any information you have been told. You should also review the description of the type of business the company is engaged in and find out if it changed its focus at any time.

It is important to know where the stock trades. There are certain requirements that must be met for it to be listed on one of the major national exchanges, such as the NASDAQ Stock Market or New York Stock Exchange (NYSE). When FINRA issued its warning to investors about China stocks, only 10 companies beginning with “China” in their name were traded on the NYSE and as few as 9 were traded on NASDAQ. Even after doing your homework, you should still be wary about investing in a stock that was touted in an unsolicited message.