The Securities and Exchange Commission SEC says there are five basic questions investors should ask before making any investment to avoid being a victim of financial fraud.

1. Is the seller licensed? State and federal licenses are required for selling a wide variety of investment products. Before giving money to a broker, ask about his credentials and what his licenses are. Then conduct a background check. The Financial Industry Regulatory Authority’s FINRA BrokerCheck website (brokercheck.finra.org) and the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov) are good places to start. We also suggest checking with your state regulator (contact information can be found at www.nasaa.org) and doing an Internet search on the adviser’s name using Google or a similar search engine to see if any red flags appear.

2. Is the investment registered? Most funds will be registered under the Investment Company Act of 1940 (aka, the ’40 Act). Similarly, exchange-listed publicly traded companies are required to file quarterly and annual reports with the SEC, which can be found in the SEC’s EDGAR database (www.sec.gov/edgar/searchedgar/webusers.htm). If an investment is not registered, it may be difficult to find financial information, sell quickly or easily get current price information.

3. How do the risks compare to the potential rewards? Investments with potential high returns commonly come with high levels of price volatility. The SEC warns that “many investment frauds are pitched as high return opportunities with little or no risk.” Ask to see actual historical returns and volatility, if available. Be wary of strategies being promoted as offering big gains and no losses.

4. Do you understand the investment? If you do not understand what the investment is, how the strategy works or what the risks are, don’t buy it. If the prospectus or the adviser does not explain the investment to your satisfaction, don’t buy it. The last thing a fraudster wants are direct questions and demands for straightforward answers. You are always better off passing up on an investment you don’t fully understand.

5. Where can you turn for help? The SEC operates an investor assistance line at 800-732-0330. Also check the SEC, FINRA and NASAA websites.

Source: “Five Questions to Ask Before You Invest,” U.S. Securities and Exchange Commission.