Investment scams can be hard to resist. They may promise insider information and great wealth, but they’re always too good to be true. In this guide to investor scams, we’ll follow the money and look at the most common ways con artists steal money from hardworking investors.

Five common investment scams 
While there are many types of investment scams — and fraudsters are constantly hatching new schemes each day — the most common investor scams fall into a few classic categories. We’re going to look at five of the most common investment frauds so you can understand the details of these unscrupulous practices in order to avoid them.

Ponzi schemes
A Ponzi scheme is an investment scam that involves robbing Peter to pay Paul. These schemes start with a scam artist who collects money from a pool of unwitting investors, promising them great returns. But instead of investing the money, the scam artist recruits additional investors and uses their money to pay fake dividends to the original group of investors.

This is the kind of investment fraud that Bernie Madoff made famous and for which he was charged with securities fraud in 2008. Madoff ran a Ponzi scheme that defrauded thousands of people out of billions of dollars. It was the biggest Ponzi scheme in history.

Pyramid schemes
Pyramid schemes are similar to Ponzi schemes in that they depend on defrauding large numbers of people to be profitable for scam artists. In a pyramid scheme, a scam artist promises investors that they’ll make money by recruiting others to buy into a fake, but credible-sounding, company. But there’s no real investment in a pyramid scheme because there’s no actual sale of products or services to the public.

Pump-and-dump
Pump and dump is another common investment scam to avoid. It involves the sale of stocks. In this investor scam, a con artist buys up a bunch of cheap stock and then spreads false information to drive up the price of that stock. When investors start buying the stock, the price rises. Then the con artist cashes out, making a profit for himself and leaving investors with worthless stock.

Advance fee stock purchase
Advance fee stock purchases prey on investors’ hopes of correcting previous investment mistakes. In this type of investor scam, a con artist promises to buy an underperforming stock in the victim’s portfolio for an irresistibly high price. To ensure sale of the stock, the victim is asked to pay a fee in advance. In this scenario, the investor should smell a rat, but he doesn’t because he hopes to unload bad stock. But in these investor scams, the victim always loses because the deal isn’t real.

Investments in fraudulent businesses
Some of the most common white-collar crime involves the sale of investments in fraudulent businesses. In these scams, con artists take money from victims hoping to profit through a work-at-home opportunity or the sale of vending machines, pay phones, or ATMs. Some of these opportunities may be legit, but many are not. The only way to avoid losing money in the sale of a fraudulent business is to do your homework and make sure a company is truly legitimate.

Buyer beware
This list might make you wonder who’d be gullible enough to fall for investment scams. While seniors are often targets of investing scams, people of all ages and backgrounds fall victim to con artists. In Madoff’s Ponzi scheme, for example, many prominent Americans — very educated people from wealthy families — lost their life savings.

While investor scams may differ, what links them all together is one thing:  psychology. A 2006 study by the Financial Industry Regulatory Authority, for instance, found that con artists tailor their pitches to their individual victims, preying on each person’s unique desires and needs. That’s why everyone should understand the details of investor scams and watch out for red flags in order to protect their money. If an investment sounds too good to be true, it usually is.