How To Recognize Dubious Providers in Investment?

Investors have many options for investing money; serious and dubious providers compete for their favor. There are several of red flags that can indicate that a provider or product is in doubt. Banking, financial services and insurance business may only be carried out with state permission. But, this does not automatically mean that the products offered are recommendable. Securities and investments may also be offered to the public if a prospectus. But that doesn’t necessarily mean that the prospectus or information sheet and the products are reputable.

man holding his chin facing laptop computer

In general, think about your investment goals before investing and check your financial options. And: don’t let yourself be rushed. Take a time to think about pros and cons of investing before investing your money. Even if you seek advice, you do not make up your mind immediately.


Unsolicited call

Is someone calling you unsolicited to offer you a deal? In no case do not go into it. Such unsolicited calls are prohibited. Investment services companies and other companies are expressly prohibited from cold calling .

E- mail / fax

Have you by a vendor stock recommendations by e – mail received, you do not know? Do you receive stock letters by fax that you did not order? Or are you being presented with an alleged insider tip that you are supposed to be aware of? Behind such offers are mostly dubious providers who want to convey shares of worthless companies to investors for their own benefit through an invented success story.

Time Pressure

Are you put under time pressure? Does the provider entice you with an exclusive business that you have to decide on very quickly? You shouldn’t go into that because it’s often just a trick. As I said: never let yourself be rushed! Serious offers are not only available today, but also tomorrow.

High Returns Or Exceptional Development Potential

Are you promised unusually high interest rates? Promises of returns that are far above the market standard can also be an indication of dubious offers. The higher the promised profit, the higher the risk that you will lose the capital invested. You can find out which returns are customary in the market. You should also critically examine recommendations on companies that are considered to have exceptional development potential. Penny stocks are particularly vulnerable to speculation and manipulation due to their low prices and trading volumes.

Unclear Product

Does the provider have difficulties explaining their product? Never buy a pig in a poke – first inform, then decide! Only buy what you really understand! Basically, the more complicated a product is, the more experience you should have with financial transactions. Get to grips with the product yourself and do not be tempted by fantasy titles and embellished graphics.

Opaque Exit Options

Clarify how and when you will get your investment back. You should be particularly careful with long-term contracts, if there is no possibility of early termination or if this would entail considerable financial disadvantages.

You should only conclude contracts that run for several years without the possibility of early exit with providers whose seriousness you have no doubt in any way. Remain critical even if you can cancel or terminate a deal at any time within a certain period of time. Such rights do not automatically protect you from financial loss either. Clarify which repayment you will actually receive if the worst comes to the worst. The following applies to securities transactions: Find out about options for parting with a security before the end of the term. It is often important to know whether there is a liquid market for the product.

Transfer Abroad

Do you want to transfer money to (outside of Europe) abroad? Be extra careful. Many investors have already lost their money in the process. You may no longer be able to see whether and how your money is being invested. There have been cases in which the company to which the money was transferred did not invest the amount as agreed or did not invest at all. Sometimes the company didn’t even exist.

Investment on trial

Are you tempted to invest a smaller amount first on a trial basis? The reason why you cannot find any information about the company during your research is that it is a young company with promising business ideas? Then the supposed insider tip is probably a trap. After a short time, the provider will report on the great success of the system and ask you to invest larger amounts. Lured by the success of your trial investment, you should be tempted to invest more money.

Pyramid Scheme

They are persuaded to invest in supposedly lucrative investment businesses. In reality, however, the funds are not invested, but used to distribute or repay previous investors. Such a pyramid scheme is usually not recognizable for investors. The investment and its return are often simulated in glossy prospectuses. Sooner or later this system breaks down.


High costs and commissions

Get an overview of what proportion of your investment amount should be used for costs, fees and commissions. Use the mandatory information provided by the provider! Investment services providers not only have to explain the total costs to investors, they also have to inform them of all costs incurred and their effects on returns. Donations are even to be shown separately. Since securities service providers are allowed to summarize the costs, they must provide you with a list broken down into individual items if you request this.

Particular caution is required with forward transactions and the day trading that is often associated with them . High fees can be incurred for each transaction. The provider is therefore fundamentally interested in a large number of deals. The fees are often so high that the bottom line is that you can hardly make a profit. Often the costs even consume the capital invested in a short period of time.

Unclear conditions

Can’t you see who your contract partner should be? Are there any warnings or other information? Check the names of the vendors and products using search engines on the internet. Information is often also available from the local consumer advice centers. Don’t do business with vendors who don’t provide you with meaningful information. Do not rely on good-sounding names or reputable websites. And if you don’t understand the contract, stay away from the offer!

How is your investment secured?

If your bank or securities trading company experiences payment difficulties, deposit insurance and investor compensation protect – to a certain extent – your balances and claims. Customer deposits are protected by the deposit insurance, customer claims from securities transactions by the investor compensation.

Statutory deposit insurance

When the bank becomes insolvent, the contractual deposit insurance covers the savings of the client. Account balances, fixed-term deposits and savings deposits of up to 100,000 dollars per customer and institute – and not per account – are legally protected. In the case of joint accounts, each individual account holder has a separate entitlement. Under special conditions, the maximum amount for a period of six months can increase to up to 500,000 dollars.

Voluntary deposit insurance

In addition to the statutory compensation schemes, the banking associations have set up voluntary security schemes. However, they do not grant bank customers any legal right to compensation.

Investor Compensation

Monies owed to you as an investor in connection with securities transactions (e.g. distributions, sales proceeds) are subject to statutory investor compensation. This protects your claims against your bank to surrender the securities held for you or money that it owes you from securities transactions. The compensation claim is limited to 90 percent of the liability and the equivalent of 20,000 dollars

However, the Investor Compensation does not pay you any compensation, for example if your insolvent bank gave you wrong advice. You will therefore not be reimbursed for lost profits or losses that you have incurred due to a wrong investment strategy.

Bearer and order bonds or bonds are not secured. The security systems also do not work if you have acquired a share in a company with your investment, for example through the acquisition of a share or a silent partnership. Your investment will then participate in both the company’s profits and losses. Always check before investing whether and how your deposits are protected if the company should no longer be able to repay the money.

Special case processing

Institutions that, due to their systemic relevance, should not go into bankruptcy are wound down in an orderly manner if they fail. In liquidation, too, as in bankruptcy, losses are shared between owners and creditors. One then speaks of a bail-in. In the event of a bail-in, you as a private investor can also participate in losses: as a shareholder, as the holder of relevant capital instruments, but also as a creditor. You are a shareholder, for example, if you have shares in this bank in your custody account . As the holder of relevant capital instruments, you are considered to be if you have invested in instruments of the institute’s additional tier 1 capital or tier 1 capital, such as subordinated bonds or subordinated loans. Among other things, you are a creditor if you have a credit account with the bank or if you own bonds from the institution – for example index certificates.

The deposits covered by the statutory deposit insurance are excluded from the bail-in. In addition, the liability in the resolution must not exceed the losses that you would have to bear if the bank had been led into regular insolvency proceedings.

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