ESSENTIALGUIDE TO

Compliments of the State of New JeiseyOffice of the Attorney General

Bureau of SecuritiesToll-Free 866-1-liwest

LIGHTBULB PRESS®

VInvestor Scams

• Types ofFraud

Understand Risk

j Investor Rights

• BackgroundChecks •RedFlags

VIRGINIA B. MORRIS AND KENNETH M. MORRIS

Dear Investor,

y picking up the Essential Guide to Safe Investing, you have already accepted the great

first step to protecting your money-knowledge. The primary mission of the New Jersey

Bureau of Securities is the education and protection of investors. You will find that this

Guide is an excellent reference for the basics on investing.

The past few years have been amongst the most trying in modern history. The credit crisis

has made the average investor’s portfolio a fraction of its former size. Retirement nest

eggs, college educations, savings to buy a home, or even for a rainy day, have simply

disappeared and those just beginning to invest face a formidable task of knowing where

and with whom, if at all, to invest their hard-earned savings.

As a securities regulator, it is our responsibility to ensure the orderly administration of the

securities markets to and from New jersey. Unfortunately, that job also sometimes

includes investigating and punishing wrongdoers. There are some simple things you can

do to never need those services, This Guide is chock full of ways to be better educated

about where to begin in selecting investments and professionals best suited for you. Don’t

know the CRD from the ADV - find it here. Need to check the background of your

investment advisor — we’ve got it! Does an offer sound too good to be true — we may

already know. Does your broker have a clean record — ask us, we know!

I wish you all the best In laying the groundwork for your financial future, and please

contact us at www.NjSecurities.gov or at 1-866-1-Invest early and often for more

information. Knowledge is power!

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ESSENTIALGUIDE TO

SAFEINVESTINC

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2 How Investing Works 1 0 Investment Sales Fraud

1 2 Red Flags

1 4 Where to Get Help

1 6 Glossary

LIGHTBULB

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PRESS

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4 Investment Risks

6 Where You Invest

8 Recognizing Stock Scams

work—ideally, to make more of it.

When you invest your money, you use itto try to make more money. You expectyour investment to grow in value, provideincome, or both. And if you invest wisely,you can increase your principal, or theamount you’ve invested, over time.

Investing isn’t the same as saving.When you save, you’re holding money ina safe place to earn interest—a bankaccount, for example. That’s fine forbuilding an emergency fund or accumulating money for short-term needs. But wheninterest rates are low, your earnings probably won’t keep pace with inflation, thegradual increase in the prices of goodsand services. On the other hand, whilethere are no guarantees with investing,there is the expectation that over timeyou’ll have a return greater than the rateof inflation.

You invest your money by buyingfinancial products with goals such asgrowth, income, or safety. There arethree basic types of investment:

• Stocks and stock mutual funds• Bonds and bond mutual funds• Cash and cash-equivalent

investments, includingcertificates of deposit, or CDs,and US Treasury bills, or T-bills

While each one of these puts moneyto work in a different way, they havesimilarities. They’re easy to buy and sell.They’re available at a wide range ofprices. And they have the potential toprovide the primary benefit of investing:the possibility for growth or income or acombination of growth and income.

INVESTING GOALSYou don’t need a lot of money to be aninvestor. But no matter what, you need tounderstand your investment goals. Alongwith how much money you can invest,your tolerance for risk and your goalsdetermine what style of investing is bestfor you.

With all investments, there’s anexpectation of making money—calledyour return—and a possibility of losingmoney, which is the element of risk.In general, the greater the chance of a

STOCKSStocks are equity investments, or ownership shares in a business. When you andother investors buy shares, you actuallybuy part-ownership of the business, Ifthe company prospers, you may makemoney because you’re paid a portion ofthe profits, known as a dividend, orbecause the value of the stock increases,or both. While you can’t predict the future,stocks have historically been strong long-term investments. But they have also beenmore volatile—or vulnerable to losingvalue—than other investments.

OTHER INVESTMENTPRODUCTSAnnuities ore savings plans that aredesigned to provide future income duringyour retirement, and are usually tax-deferred.This means you don’t pay taxes on yourearnings until you start withdrawing, usuallywhen you’re retired. Annuities, however,can tie up your principal for long periodsand have hefty commissions and penalties

substantial return on an investment,the greater the risk of loss onthat investment.

Given your investment goals, youshould decide how much risk you cantolerate. You should not invest moneyyou need to live on, and thereby putthat money at risk. Your age is a bigfactor. If you’re near retirement age,your goal may be financial security. Soyour goal would be to preserve yourprincipal and generate a stream ofincome. If you’re young, your goal may

ESSENTIAL GUIDE TO SAFE INVESTING

How Investing WorksWhen you invest your money, you’re putting it to

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ESSENTIAL GUIDE TO SAFE INVESTING

BONDSBonds are debt securities that you andother investors make to bond issuers,including corporations and governmentalunits, such as the US Treasury, states,counties, municipalities, or specialdistricts or authorities, When issuersborrow, they promise to pay back thefull amount of the loan at a specifictime plus interest, or a percentageof the loan amount, for the use of yourmoney. Most investors buy bonds, alsoknown as fixed-income investments,because they expect to receive theirinvestment amount back and becausethey like the regular interest income.

for early withdrawal. Therefore, they maynot be suitable for elderly investors.Insurance policies protect you and yourfamily against financial difficulty due toillness, disability, and death, but some typesallow you to choose how your premiumpayments are invested.

he growth or concentrating onbuilding up the value of your assets.So you can take more risk, becauseif you lose money in some years,you have time to recover it inother years.

It’s important to keep your goalsand risk tolerance in mind as youinvest, because if you hear aboutinvestments that sound enticing—promising big returns—you’llknow that they usually come with))ig risks.

CASHCash-equivalent instruments, such asT-bills or certificates of deposit, arelow-risk, short-term investments. Theyusually pay more interest than savingsaccounts and can be easily sold—that is,they’re highly liquid. And because theyare short term and low risk, they may bemore secure than stocks, bonds, oi’ moreexotic investments, but you may forfeitsome interest if you cash in a CD beforeits term is up.

MUTUAL FUNDSA mutual fund invests money that youand other people put into the fund.With this money, a fund can buy manydifferent investments, usually eitherstocks or bonds but sometimes bothstocks and bonds. Because each mutualfund is managed by a professional, youbenefit from that expertise. Before youbuy shares in a fund, you should readits prospectus, which describes theinvestments the fund makes, its goals,and management style, as well as thelevel of risk you’retaking and anyfees you’ll payto buy in orsell out ofthe fund.

INVESTMENT VOCABULARYStocks, bonds, and notes are common types ofsecurities, a term that once referred to the actualdocuments issued to represent investment ownership.Today that information is recorded electronically, butthe name securities is still used.

Investments are sometimes referred to as products or vehicles. These terms usually mean you getaccess to a number of securities in a single package.Often that package includes—for a fee—somethingelse, such as professional management.

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Investment RisksWhen you invest, you can lose money as well as make it.

LIMITING RISKWhile taking some risk is normal ininvesting, there are ways to balancevarious risks to produce a potentiallygreater return, or profit, on yourinvestment.

You can spread your money. ordiversify it, among different types ofinvestments. One of the riskiest ways toinvest is to put all your money in just oneor two investments. If that investmentgoes down in value, your money goes downwith it. But by spreading your money out

UNDERSTANDING PRICESJust because an investment is cheap,it’s not necessarily a good value. Aninvestment’s price does not mean thatit is suitable for your goals.

For instance, if you have just $250to invest, you would almost always bebetter off buying ten shares of anestablished, well-regarded companyat $25 a share than buying 250 shares

and owning a number of investments withdifferent levels of risk, you might protectyourself. That’s because as the value ofsome investments goes down, the value ofothers usually goes up. For example, whenstocks are providing strong returns, bondreturns often slump. But when investorsare buying bonds, stock prices tend toslide. Owning a mix of both types ofinvestments can balance out the riskof owning just one type.

When you invest, it’s also smart towatch volatility, or the degree to which

of a $1 stock in a company you havenever heard of. An established companyoffers investors full disdosure—information about the company’sbusiness, outlook, and the stock itself.Thus that $25 stock usually poses lessoverall risk than the $1 penny stock,which is probably unlisted, much morevolatile, thinly traded, and less likely tobe around in a few years.

ESSENTIAL GUIDE TO SAFE INVESTING

If you want the rewards of successfulinvesting—greater financial securityand the confidence that comes withtaking important steps toward meetingyour goals—you have to be willing totake some risk. This means acceptingthe fact that you might lose money oncertain investments.

All investments can shrink in valueas well as grow, so at times they could beworth less than you paid for them. That’s

true in part because investments don’thave a fixed price. Instead, they changein value to reflect investor demand.That demand is based, in large part,on how much money potential buyersare willing to pay for a particularinvestment. What’s happening in theeconomy and the world at large alsoaffects what people are willing topay to invest.

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ESSENTIAL GUIDE TO SAFE INVESTING

an investment gains or loses value andthe frequency of those changes. The morevolatile an investment is, the more you canpotentially make or lose in the short term.If you have a low risk tolerance and ashort time to meet an investment goal, youmight want to avoid volatile investments.

SPECIAL RISKWhile all investments present some risk,it’s important to note that there are sometypes that are especially risky. In fact,these kinds of investments pose such highrisks that many investors steer clear ofthem completely. Many professionalsdiscourage people from buying thesetypes of investments:

OTC stocks: Shares in companies thataren’t listed on a major stock marketlike the New York Stock Exchange orthe Nasdaq Stock Market are called“over-the-counter,” or OTC, stocks. OTCstocks are often thinly traded, whichmeans they’re not traded often or in largequantities. That makes these stocks riskybecause they can be difficult to sell, ifnecessary. OTC stocks are also riskybecause public information on theirprices, available quantities, and on thecompanies themselves is much lessaccessible than on stocks listed onstock exchanges.

Penny stocks: A specific type of OTCstock, penny stocks sell for less than$5 a share. While some penny stocks mayproduce big returns over the long term,many of them turn out to be worthless.

Penny stocks are often falsely promotedto unsuspecting buyers, who are led tobelieve they are getting a bargain and theshares will be worth far more someday.Professional investors such as mutualfund managers tend to avoid penny stocks,and responsible brokerage firms warntheir clients of the risks involved beforehandling transactions in these stocks.

Investments with withdrawalrestrictions or large fees: Someinvestments may prevent you from withdrawing your money for a certain periodof time or charge a steep fee upon earlywithdrawal. While the investments may beperfectly legal, you should always know upfront if there is a withdrawal restriction,how long it lasts, anti what the penaltywould be. Deferred variable annuities, forinstance, are legitimate investments butmost charge steep withdrawal fees for upto seven, or sometimes ten, years after youpurchase them.

Investments with little liquidity: Aninvestment with little liquidity cannot beeasily converted to cash without losingvalue. An example of such an investmentis a limited partnership, which poolspeople’s money into real estate or someother venture. Limited partnerships arenot traded on stock exchanges or similarmarketplaces, so if you need your money,you could have trouble finding someoneto buy your portion of the partnershipat the price you want. For this reason,limited partnerships and other illiquidinvestments are considered risky.

ESSENTIAL GUIDE TO SAFE INVESTIN

Where You InvestInvesting safely starts by finding the right place toopen an account.

When you invest, you buy and sell, ortrade, securities. Usually you tradeinvestments through an intermediary,who places your order in exchange for acommission or fee, The intermediary youchoose will depend on the investmentsyou want to make and whether you wantfinancial advice as well.

You can buy almost any kind ofinvestment by setting up an account ata securities brokerage firm. Brokeragefirms, also called broker-dealers, must belicensed, and the brokers, also known asagents or registered representatives, whowork there must be registered. Brokersreceive commissions on what they sell.Some brokerage firms operate onlyonline, but they must still be licensed,and you still pay for their services.Many banks operate subsidiariesseparate from their regular bankingoperations where brokers trade securities,

An investment adviser providesadvice, helping you develop a plan formeeting your financial needs and goals.Like securities broker-dealers,investment advisers and investmentadviser representatives must be registered, though the rules governing theirresponsibilities differ. Most investmentadvisers get paid with fees, notcommissions. Arid some don’t tradeinvestment p inducts at all, but justprovide advice for a fee—so you need toset up a brokerage account somewhereelse to actually buy and sell investments,

If you want to invest just in mutualfunds, you may open an account with amutual fund investment company andpurchase shares in the fund directly. Oryou may buy funds through your brokeror adviser. And if you want to buy onlyinsurance products, like annuities, youcan work with an insurance agent.Insurance agents must be licensed byeach state in which they sell products,and most are paid with commissions.

DOING YOUR HOMEWORKUnfortunately, some investment professionals don’t act responsibly. or mighteven try to rip off clients. Responsiblebrokers, investment advisers, andinsurance agents will show you recordsproving their legitimacy. But, to avoidbecoming a victim, no matter where you

invest you can—and should—run youl’own background check. If there areproblems or if any of these professionalshas been accused of wrongdoing, theserecords will show that.

There are several ways to check aparticular investment salesperson’sbackground. For starters, get their officephone number and address to be sure theactually have a place of business. Thencheck that they’re properly licensed andregistered. Doing that depends on the typof salesperson:

Ii state Registered

FlNRegis,.j

Brokers: Whether they work at brokerage firms or banks, brokers are calledregistered representatives or agents, andmust be registered in the states wherethey work and with The Financial IndustryRegulatory Authority (FINRA). To seeinformation on a particular broker, you

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GETTING STARTEDNever invested before? It can be intimidating,but here’s how to start:Step 1: Identify your goalfor investing and one tyne ofinvestment that may he’p you

reach it, suchas a mutualfund or stock.Step 2: Find a financialadviser or broker to help

can review records held in a national database called the Central RegistrationDepository, or CRD. The CRD containsinformation such as licensing status anddisciplinary history. To obtain a CRD formcall your state securities bureau. You canfind it by contacting the North AmericanSecurities Administrators Association atwww.nasaa.org, or 202-737-0900. In addition, you can also speak to a supervisor,called the branch manager, for moreinformation on a particular broker.

Investment advisers: A firm that getspaid for providing investment advice must

register as an investment adviser, eitherwith the state or Securities and ExchangeCommission (SEC). Registered investmentadvisers are required to file a documentcalled Form ADV, which lets you checktheir backgrounds. One part of Form ADVlists any disciplinary actions against theadviser—but not current complaints, ifthere are any. The other part contains a

narrow your choice to a particular investment.Go with someone you are referred to rather thanfinding someone through the phone book or ads.Talk to friends, coworkers, and family, or evenyour bank manager. Never respond to strangers’solicitations to invest.Step 3: Write a check for yourfirst investment to your newbrokerage, bank, mutual fund,or other account, not to anindividual. You can sometimesinvest as little as $50 or

If you invest through a 401(k), 403(b),or similar account offered through youremploye you must deal with the companyyour employer has chosen to run the plan.Called a plan provider, this is usuallyo brokerage firm, a bank, an investmentcompany, or an insurance company.

summary of the adviser’s background andfees. You can see an adviser’s Form ADVby contacting your state securities bureau.Investment advisers who buy and sellsecurities must also be licensed asregistered representatives.

Insurance agents: Insurance agents arelicensed by the state or states in whichthey sell their products. Independentinsurance agents sell products for at leasttwo different insurance companies, whileexclusive insurance agents represent onlyone company. Most insurance agents arepaid with commissions on the productsthey sell.

$100 with a direct deposit account, but gettingstarted may require a certain minimum, such as$1,000 or more.

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1 ESSENTIAL GUIDE TO SAFE INVESTING

Step 4: Track your investment by reading theinformation you get in the mail and asking youradviser for

ESSENTIAL GUIDE TO SAFE INVESTI

Recognizing Stock ScamsIllegal schemes lurk out there, but understanding how thework can help you spot and avoid them.

fraudulent stock scams or sell stocksillegally, The locations range fromrented office space that might seemlegitimate to private homes or evenoverseas sites,

rfypically, boiler rooms feature rowsof telephones used by cold callers.Cold callers phone potential victimsrandomly, using unscrupulous, high-pressure tactics and sometimes falseinformation, to try to sell high-riskstocks or other investments.

A bucket shop, or illegal brokeragefirm, may never buy the securities foryou that you ordered. Rather, the conartists pocket your money, figuringthat you won’t notice the schemeright away. Then the entire operationdisappears—sometimes literallyovernight—before authorities cantrack down their whereabouts,

You should hang up if you receivean unsolicited phone call about aninvestment and the caller pressures

An investment scam might involve legitimate products, but the way they aresold might be illegal. Or a scam might be based on selling illegal investmentsaltogether. Either way con artists prey

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on investors whom they can trick.But by recognizing theii’ schemes, THE BOILERyou may avoid becoming their

- ROOMHere’s a look at

some common typesof securities fraud.

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PUMP AND DUMPPARLOR

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- THE SCAM $HACI(• Pump und dump is a stock scam in

which the scainmer buys shares inlow-priced stocks of small companies,known as penny stocks. He or shethen spreads false information, oftenthrough a cold call or on the Internet,to pump up the price of these stocks.After investors caught up in the hoaxbuy shares, the scammer sells—ordumps—the stock at the highestprice, and disappears with the profit,leaving other investors holding almostworthless shares. In art Internet chatroom—where this scheme often takesplace—you might identify a pumpand dump scam by a surge of undocumented information on a particularpenny stock, urging you to buy it. Steerclear of an investment if you hear aboutit only in chat rooms or in a phone callout-of-the-blue from a broker you havenever talked to before.

• Boiler rooms and bucket shops arelocations from which con artists launch8

Pyramid schemes are another type of scam.A con artist recruits people who pay toparticipate in o supposed investment. Torecoup their money, these new recruits oretold to find more people, who in turn put inmoney. Each new recruit then is expected torecruit additional players. Be careful of anyoffering in which you have to not only putmoney up front but olso find other investors.

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-1JJ j&csionoiithespot. You should also hang up if youask the caller for written information, —

and he or she refuses to provide it orevades questions.

You can avoid being scammed thisway by never investing in anything overthe phone without reading a prospectusfirst and understanding the risks ofthe investment. You should also knowand feel comfortable with the personattempting to sell you the investment.One way to establish some level ofcomfort is to check out the person orfirm with your state securities regulatorto be sure they are properly registeredor licensed.

• Churning is a type of fraud in whicha stockbroker or investment adviserto whom you have granted control ofyour account buys and sells securitieswithout explaining why so much tradingis necessary. If you end up paying morein commissions than you earn on yourinvestments because of your broker’sfrequent trading you might suspectyour account is being churned. Fear of

• A re’oad scam takes place after youhave been tricked on an investment andthen told you can recoup your moneyby investing more money or rollingover your initial investment into a newinvestment. This way you’re “reloaded”and set up for a second scam. You maybe told you can get your funds back ifyou try again. Or for a fee, scammersmay offer to file claims paperwork orgive you a reimbursement they are holding for you. This is a fraud known as anadvance fee scheme. If you have lostmoney to fraud, you can get legitimate

government assistance by contact. ing your state securities regulator,

• which you can find from theNorth American Securities

Administrators Associationat www.nasaa.org.

or investment adviser (known as givingthem discretionary authority over youraccount). Always carefully review yourmonthly statements for illogical oroverly frequent transactions.

• If a broker sells unregisteredsecurities, he or she is not dealingin legitimate investment products.Investments must be registered at thestate level before they can be sold,unless they are traded on a nationalstock exchange like the New York StockExchange, American Stock Exchange,certain regional exchanges, or theNasdaq. Most unregistered securitiespromise low risk and high returns.Usually their promoters are the onlyones who make any money. You cancheck the registration statement of asecurity by accessing a free databaserun by the Securities and ExchangeCommission, at www,sec.gov/cgi-bin/srch-edgar. Don’t invest in any securities unless they’re properly registeredor exempt from registration.

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CHURNING UNREGISTEREDCHAMBER ALLEY

4 ESSENTIAL GUIDE TO SAFE INVESTING

churning is one reason to avoid turningcontrol of your account over to a broker

Investment Sales FraudDishonest salespeople can cause you a lot of trouble.

While most brokers, investment advisers,financial planners, and insurance agentsare honest, some aren’t. But if you’realert and follow some basic rules, youcan protect yourself against fraudulentor inappropriate investments by avoiding salespeople who pressure you forimmediate decisions and by checkingsalespeople’s credentials before youwork with them. What may be harderis to decide whether an otherwiselegitimate product is right for you.

LICENSING AND REGISTRATIONIn cases of iiwestment fraud, a salesperson is operating illegally. Unregisteredbrokers and investment advisersmight appear to be legitimate and theymay even sell genuine products, but theyoperate without being properly licensedto do business, which is illegal. Everythingmay seem fine at first.,but then they mightdisappear. Your bestprotection is tonever work with aninvestment professional before youcheck whether heor she is registeredor licensed with the

state where you invest or the Securitiesand Exchange Commission. Always reviewa firm’s and broker’s CRD registration,employment and disciplinary record, andan investment advisers Form AD\’ tocheck qualifications and to see if he orshe has any prior disciplinary history.

In other cases, the way in whichinvestment products are sold may bea problem. Many salespeople offerinvestment seminars at a hotel orother public facility, focusing on financialor retirement planning, Some seminarscan be educational and useful, but othersare high-pressure sales pitches intendedto sell investment products. If you attend aseminar, it’s unwise to buy anything there.And you shouldn’t reveal detailed personalor financial information, such as yourSocial Security number.

ESSENTIAL GUIDE TO SAFE INVESTING

DeferredVariableAnnuities

“Callable”Certificates

ofDeposit

PRODUCT RECALLSCertain types of investment products may be a problem,depending on how and to whom they’re sold.

Deferred variable annuities may be inappropriatelymarketed to people who should not buy them. Theseproducts are not usually suitable for older clients becausethey build value over a long period, tying up the assets for

years. If you do buy a deferred annuity and realize laterthat the product is inappropriate for you, you are likely to

face stiff surrender fees, sometimes as high as 7% to 10%of the amount invested, to get youl’ money back, You will havealso lost what you paid in fees and commissions.

HOW FRAUD FINDS YOUCon artists might track you down in a variety of ways:• Buying your information: Many scam artists will call you, email you, or mail you

letters, all unsolicited, offering unrealistic promises of guaranteed returns or no-risk investments. Some con artists buy names and addresses of people who subscribe to magazines totarget potential new victims.

• Luring you in: Other scammers try fo hook you in online investment chat rooms by ravingabout a hot stock that sparks your curiosity. Some place ads in newspapers offering guaranteedreturns on can’t-miss investments. Even mainstream publications might carry these ads.

• Talking to you: You might even meet a scam artist in person, because some go wherethey think likely targets might congregate. Never discuss your personal financial situationwith a strange even if he or she seems helpful. If someone offers you an investment, turn itdown or ask for a business card. Then thoroughly check the qualifications of the person andthe firm named on the card by contacting your state securities regulator.

Long-term bonds—which typicallymature in more than 10 years from thedate of issue—usually offer higher rates

of interest than other types of bonds.But some salespeople don’t say

that the greater income is inexchange for locking up you:money for a lengthy period. Ifyou need your investment principal before the bond matures,you will be able to get it, butyou might have to sell for lessthan you paid for the bondsif interest rates in generalhave increased or if the bond’srating has been lowered. You’llalso have to pay a secondcommission when you sell.

BUYER BEWARELiving trusts, a tool you canuse to pass assets to your heirsand to hasten the settlement of

your estate after you die, can bevery useful. But some scam artists

actually operate living trust mills,exaggerating the benefits of the products while churning out documents thatare false and misleading. In pitchingthe trusts over the phone or in a visit toyour home, the salesperson may say, forinstance, that these products replacethe need for a will and eliminate estatetaxes—neither of which is true. If youwish to explore a living trust, work onlywith an experienced attorney whose references you can check with the state orcounty bar association.

Viafical settlements providelump sums of cash in exchange for thedeath benefits of a life insurance policy.Companies that market these productssometimes take advantage of consumersby underpaying for the benefits or byhr,sine pypp.hrp f,

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k I ESSENTIAL GUIDE TO SAFE INVESTING

“Callable” certificates of deposit(CDs) are very different from regularbank CDs. Most conventional CDs maturein terms of three months to five years,earning interest in that period. Then youcan take your money out. But callable CDsmight not mature for as long as 10 to 30years. In that period, your money may beinaccessible unless you pay a steeppenalty—an important fact that somedishonest investment salespeople conceal.

Certificates of deposits (CDs) are timedinvestments offered by banks on whichyou generally earn interest at a fixed rate.The rate is usually determined by currentinterest rates and the (D’s term.I

Red FlagsHow can you spot trouble? Certain warning signscan point the way.

While scams and frauds can be complicated, it’s not necessarily hard to spottrouble. Certain red flags may warn youof problems. Although these warning signsaren’t foolproof, you could lower yourchances of becoming a fraud victimif you pay attention. Bottom line: Avoidany salespeople, financial products,and investments associated withthese red flags.

SHADY SALES TACTICS

No reputable, trustworthy broker orinvestment adviser will pressure you tomake an immediate dedsion about aninvestment. If your investment salesperson puts on the pressure, won’t explainthings, or rushes you to make decisions,he or she is acting inappropriately—andmight even be doing something illegal. Ingeneral it’s smart to avoid investing withanyone who makes you feel even slightlyuncomfortable.

Another red flag: You may be contactedby an investment salesperson based onyour affiliation with an organized group,such as a church, club, support group,charity, or veterans group. While someinvestments can be legitimately sold thisway, so many financial scams start outlike this that there’s a name for theactivity—affinity fraud. This termapplies to dishonest brokers or investmentadvisers who swindle people by preyingon their affinity with a group. People ina group tend to naturally trust othermembers—and disreputable brokers

and advisers may abuse that trustby posing as participants. You’rebest off staying away from anyonewho contacts you through anorganization you belong to.

Bypass any broker or investment adviserwho guarantees that your investmentswill earn a certain amount of money ina specific time period, or who offers ano-risk investment. These salespeopleare not acting legitimately. Investmentresults cannot be guaranteed—not eventhose of cash investments, And while someinvestments pose less risk than others, thefact is, all investments can lose as well asearn money.

By the same token, steer clear ofsomeone who promises unrealisticallyhigh investment returns. If a brokerinsists that a certain investment willreturn, say, 2%, you’d be smart towalk away—he’s probably dishonest.Historically, very few securities havemanaged to obtain such high returnsconsistently. What’s a i’ealistic return?That depends on the investment, butmany experts think even an averageannual return of 10% on a diversifiedportfolio is relatively high. Over the pastfive decades, the average annual totalreturn of the Standard & Poor’s 500Index—a measure gauging large-companystock market performance—was 11%.

ESSENTIAL GUIDE TO SAFE INVESTING

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You might also spot red flags indocumentation about your investmentaccount. If records and paperwork aremissing, incomplete, or seem altered, thatcould mean trouble.

When you open an investment account,you should receive copies of all completedforms and agreements. If an investmentsalesperson refuses to give you thesedocuments, you’re better off openingyour account elsewhere. This could be asign you’re dealing with an illegitimatebrokerage or advisory firm.

You should get regular monthly orquarterly investment account statements,which show how much money you haveinvested and how your investments haveperformed. Your statement should alsoshow any commissions, sales charges,maintenance or service charges, and

GET THE FACTSIn other cases, the information madeavailable to you on a particular investmentmight be incomplete—and this could hintat an unregistered, or illegal, investment.

While the actual information you’llsee on legitimate investments varies, youare always entitled to certain basic data.This includes the name of the companyissuing the security, the security’s priorperformance, terms of the investment,any fees you must pay, and—with bondsor CDs—the maturation date.

To ensure you have complete information, always obtain a prospectus—adocument explaining fees, returns, andrisk, among other things—before buyingshares in a mutual fund. Before buyingstocks, get a stock symbol and checkit out on the Internet, in the newspaperfinancial pages, or at the library. Whenbuying bonds, ask to see the offeringcircular, which describes the bond issuerand its objectives.

If you are not given or can’t obtainbasic information like this, it’s wise to turndown an investment, no matter how goodit seems. And if a broker or investmentadviser won’t give you the information youask for, it maybe smart to avoid both thesalesperson and the investment.

PUT IT IN WRITINGKeeping track, in writing, of all yourconversations and correspondence withyour broker or financial adviser aboutyour investment decisions, as well as anyproblems you experience, is essential. Ifyour relationship goes sour, you’ll havematerial to help bolster your claims.

In fact, keeping all of your records isvery important. Any documentation youprovide could help securities regulatorsinvestigate fraud or misconduct, Thebetter and more complete documentationyou possess, the easier it could be forofficials to prosecute lawbreakers.

ESSENTIAL GUIDE TO SAFE INVESTING

transaction or redemption fees.When you review the statements, look

for discrepancies, such as unauthoriaedtrades or missing funds. While they couldbe the result of a misinterpretation orerror, discrepancies could also indicatethat your investment professional isengaging in misconduct. Ask immediatelyif information on your statement doesn’tseem right.

I

Where to Get HelpRegulators can help you fight back against fraud.

If you think you’re the victim of aninvestment scam, fraud, or deception,you can take action. Depending on theoutcome, you might get your money back,although unfortunately in many casesyou won’t. But with your cooperation,securities regulators can shut downillegal operations and may put criminalsbehind bars,

STATE AND FEDERALPROTECTIONCertain laws—both state and federal—are designed to protect you and otherinvestors from fraud, scams, misconduct,and other types of wrongdoing.

In New Jersey, the regulatory agencythat enforces the securities lawsis the New Jersey Bureauof Securities, which ispart of the Office ofthe Attorney General.The Bureau enforcessecurities laws,regulates securitiesbroker-dealersand investmentadvisers, andinvestigates fraud,

If you suspectinvestment fraud ora scam, your first stopshould be the Bureau, whichresponds to consumer complaints.The Bureau’s primary mission isprotecting investors.

At the federal level, the Securities andExchange Commission (SEC) regulatesthe nation’s securities markets, includingthe stock exchanges, bond issuers, antimutual funds as well as brokerage andinvestment advisory firms.

The brokerage firm where you have anaccount is known as a broker-dealer.This means the firm has a license fromthe SEC and the state in which it operatesthat entitles its agents — who must also beregistered—to buy and sell securities farclients as well as for the firm’s own account.

MEDIATE OR ARBITRATE?If you think that a specific stockbrokerdefrauded you, you have an additionalresource. You can file a complaint forarbitration or mediation with FINRA.This self-regulatory organization overseesbroker-dealer firms and stockbrokers.

If you want to file a complaint withFINRA, you must do it within a certaintime limit, usually two to five years fromdiscovery of the problem. The limitdepends on whether the fraud violatesstate or federal law.

Once you have filed a complaint, youusually have two options:

• Mediation, in which you and thebroker-dealer work with a third party

to resolve your differences.Usually less expensive

and less confrontational than otheroptions, mediationis voluntary andnonbinding. Thismeans you and thefirm must agree toa settlement beforeit becomes final.

• Arbitration usuallyinvolves a panel that

hears the issue, reviewsevidence, and decides the

outcome. The panel may include twopublic panelists and one industrypanelist or three public panelists withno industry representation. The choiceis yours, not the brokerage firm’s.You won’t need to testify if your claim

is for less than $25,000. Rather, in a process know-n as simplified arbitration,the panel bases its decision on documentsand written explanations from you andthe broker.

It’s often smart to hire a securitieslawyer for these proceedings because thebroker-dealer may have legal representation and because an arbitration decision isbinding, which means you cannot appealit or try again in court.

Your chance of getting your money backdepends on an arbitration panel’s decisionor a mediation settlement. However, ifthe broker-dealer or investment advisoryfirm goes out of business, you may not beable to recover your assets—even if anarbitrator rules in your favor.

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New Jersey Bureau of Securitieswww.njsecurities.govor call toll-free 866-I-Invest (866-446-8378)FINRAwww.finra.orgor call 212-858-4200

OTHER REMEDIESMost people handle their complaints withmediation or arbitration. In fact, you probably agreed to use arbitration when yousigned your account-opening documents.But if you didn’t agree that any disputesmust go to arbitration, you might insteadbe able to sue the firm in state or federalcourt. Before you go this route, you shouldprobably ask an attorney if he or shethinks your dispute could be successfulin court. If it can, you should usuallyhire a securities attorney to handle yourcase—which could be costly and long.But so could arbitration.

Whether you pursue an action withFINRA or in court against your broker orinvestment adviser, it’s generally smart tofile a complaint with the Bureau. The statemay investigate and possibly take actionagainst the person who defrauded you,and can help prevent the fraudster fromcheating other people in the future.

JUST THE FACTSRegardless of where you file an investorcomplaint, it’s best to give detailedinformation and any documents thatsupport your claim to regulators to helptheir investigation. Ideally you should tellthe regulator:

• Your name, telephone number, address,and email address

• The name, telephone number,address, email address, and websiteof any individual or company namedin your complaint

• Specific details of how you weredefrauded or misadvised, includingspecifically what you were told aboutthe investment

• How much money was lost to fraudor a scam

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Investor Resources

Agent is an individual who handlesfinancial transaCtiOnS between a personand an institUtioll. Agents may also becalled brokers, financial consultants,account executives, registered representatives, or investment executives.Bond is a type of investment that paysinterest over a fixed term. When thebond matures at the end of the term, theissuer repays the principal, or investmentamount, to the owner of the bond.Brokers work for brokerage firms, handling client orders to buy and sell stocks,bonds, and other securities, usually inreturn for a commission. Brokers becomeregistered representatives by passing atest required by the states and F’INRA andare registered in the states in which theydo business.

Brokernge accounts allow you to buyand sell securities through a brokerage orother financial services firm.Brokerage firm is a company registeredby the states and The Financial IndustryRegulatory Authority (FINRA) to buy andsell securities for clients and for their ownaccounts. Also known as a broker-dealera brokerage firm often offers a range ofproducts and services, including financialplanning and educational programs.Commissions are sales charges levied bybrokers and other sales agents for eachtransaction. With full-service brokers,the charge is usually a percentage of thetotal cost of the trade. Online brokers maycharge a flat fee for each transaction.Disclosure documents explain how afinancial product works, the terms towhich you must agree in order to buy it,and the risks in making such a purchase.Financial planner is someone whoevaluates your personal financial situationand develops a plan to meet both yourimmediate needs and long-term goals.Financial planners may or may not haveprofessional designations and certifications, and may or may not be registeredor licensed to sell investments.Interest is the income, figured as apercentage of your principal, which you’repaid for putting money into a savingsaccount, CD, bond, note, or other fixed-income investment.

Insurance agent is a person licensedto sell insurance by the state in whichhe or she works. Insurance agents arenot automatically registered or licensedto sell securities or offer investmentadvice. Those activities would require

registration with the state and federasecurities regulators.

Maturity date is when a bond comesdue. On that date, the full face valueof the bond (and sometimes the finalinterest payment) must be paid in fullthe investon

Mutual fund is a professionally manainvestment company that pools the asof many investors to trade in stocks,bonds, and other securities, dependingon the fund’s investment objectives.Mutual funds charge management feesand in some cases, a sales fee (also knas a load). Details of a fund’s objective,management, and expenses are ex-plairin its prospectus.

Portfolio is a group or collection ofinvestments, Expanding your portfolio 1purchasing different investments aIlowyou to minimize the risk of investing inonly one type of investment. This is knoas diversification.

Principal is a sum of money and can relto an amount you invest, an amount youborrow, or the face value of a bond.Prospectus is a formal written offerto sell stock to the public, containinginformation about the issuing companyand the risks of making the investment.A mutual fund prospectus describes theobjectives, risk level, past performance,fees, and other details about the fund.Registered representative is a persoiwho has passed exams required by thestates and FINRA to qualify for registration. Registered representative is theindustry term for agent or broker.Return is what you get back on anamount you invest. A positive returnmeans you end up with more money thanyou started with, and a negative returnmeans you end up with less.Risk is the chance that you will loseall or part of your investment. You shouldseriously consider the level of risk youwould be taking before choosingan investment.

Stock is an equity investment thatrepresents part ownership of a corporation and entitles you to a part of itsearnings and assets. Each share of stockis one unit of ownership.Volatility indicates how much andhow quickly the value of an investmentchanges. The more frequently the valuechanges and the more quickly thechanges occur, the greater the volatility.

)InvestorProtectionInstitute

Design Director Dave Wilder

Designer KaraW. Hatch

Editor Mavis WrightProduction and Illustration Yuliya Karnayeva, Thomas F. Trojan

SPECIAL THANKS

Debora C. Whipple, Director of Investor Education, New Jersey Bureau of Securities, for initiating

coordinating, and promoting the project.

State of New Jersey

©2006, 2007, 2011 BY LIGHTSULB PRESS, INC. ALL RIGHTS RESERVED.

Lighlbulb Press, Inc., 37 West 2dth Street, New York, NY 1(1001

Tel. 212-489-8800, wvrvv.lighlbutbpress.com

ISBN: 1933569-13-I

No part of this book may be reproduced, stored, or transmitted by any means, including electronic,

mechanical, photocopying, recording, or otherwise, without written permission from the publishei except

for brief quotes used in a review. While great care seas taken in lhe preparation of Ibis book-, the author

and publisher disclaim any legal responsibility for any errors or omissions, and they disclaim any liability

for losses or damages tucurred throogh tbe use of the information in the book. This publication is designed

In provide accurate and aulhoritalis’e information in regard to the subject matter covered. It is sold with

the undersianding that neither the author nor the publisher is engaged in rendering financial, legal,

accounting, or other professional service. If legal ndvice, financial advice, or other expert assistance is

required, the services of a competent professional person should be sought.

liwestorProtectionTrust

This guide was funded by a grant from The

Investor Protection Trust (IPT). IPT is a nonprofit

organization devoted to investor education, Over half

of all Americans are now invested in the securities

markets, making investor education and protection

vitally important. Since 1993 IPT has worked with

the States and at the national level to provide the

independent, objective investor education needed by

all Americans to make informed investment decisions.

The IPT strives to keep all Americans on the right

money track.

www.investorprotection.org

The Investor Protection Institute (IPI) is a

nonprofit organization that promotes investor

protection by conducting and supporting research

and education programs.

www.protectinvestors.org

A variety of non-commercial investor education and

protection materials, including booklets, video, and

curriculum, are available and can be downloaded for

educational purposes at: www.investorprotection.org.

LIGHTBULB PRESS

Project Team

LIGHTBUL

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PRESS

ESSENTIAL GUIDE TO SAFE INVESTINGprovides a concise and comprehensive explanation ofhow individualinvestors ofall ages can protect themselves againstfraud, scams,and other types ofwrongdoing. The guide offers an overview of howinvesting works, explains common kinds of investment fraud, andidentifies the danger signs that all investors should know. It alsosuggests remedies for anyone who has been the victim of securitiesfraud. With its engaging artwork and straightforward language,the guide helps readers understand the importance of caution andsafety when making investment decisions.

Lightbulb Press, Inc.37 West 28th StreetNew York, NY 10001

www.lightbulbpress.cominfo@lightbulbpress.comPhone: 212-485-8800

555EN GUIDE TO SAFE INVE5TINGESSENTIAL GUIDE TO SAFE INVESTING

hwestfllellt Sales Fraud

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