Watch out: Market volatility could make you a target for scammers

Since the arrest of former investment advisor Bernie Madoff for fraud 10 years ago, many protections for investors have been put in place. But those putting money into the market shouldn't let their guard down and assume they're completely protected by the Securities and Exchange Commission and other regulatory agencies.

Scammers will always find a way to get to their targets. Just when the dust settles on one financial crisis or scam, another one pops up. And, during times of heavy market volatility such as the one the market has been experiencing recently, the risk of being targeted by a scammer is high.

Why Don't investors run for cover during volatility, meaning they'd find a safe place to hide

Not always.

"Market volatility is very unnerving, especially for people who are relying upon their returns," consumer protection expert Bill Francavilla told CNBC. That's when emotion kicks in. "It puts people in a position where they make bad decisions."

And con artists always target the vulnerable, said Francavilla, who is also the author of "The Madoffs Among Us" and once served as corporate director of wealth management at Legg Mason.

Older Americans can be particularly susceptible to fraud, especially since they may be at or past the peak of their wealth accumulation. According to a study conducted by The Wharton School's Pension Research Council, nearly 5 percent of people over 50 reported at least one form of investment fraud. The study was based on the responses of 1,268 randomly selected participants, age 50 and older.

And if you think that the wealthy, or people who don't know much about finance, are the most likely to get scammed — think again.

Olivia Mitchell, executive director of Wharton's Pension Research Council, told CNBC there really aren't a lot of common factors when it comes to who might be the target of scam.

"It didn't really seem that the more financially knowledgeable were less likely to be scammed," she noted. Those with more wealth were also not more likely to be become a victim.

"It is not easy to predict who is going to be financially victimized," said Mitchell, who is also a professor at the school.

And as the nation's wealth gets larger, the problem is only going to be exacerbated, according to Francavilla.

"The scammers are always going to be there," he said. "They are out in full force. They follow money."

Types of scams

There are a dozen different types of fraud listed on the SEC's website. They include:

Ponzi schemes: The scam usually starts with a promise of high returns with little or no risk. However, the fraudsters don't invest the money collected. Instead, they pay existing investors with funds collected from the new investors. Since the scheme needs a constant flow of new money to survive, eventually it collapses.

Pump and dump schemes: In this scam, fraudsters try to boost the price of a stock with false or misleading statements about a company. After the stock rallies, they look to profit by selling their own shares, dumping them into the market.

"Prime Bank" investments: Scammers will tell potential victims their funds will be used to buy and trade "Prime Bank" instruments and use complex terms to make the fraud seem legitimate. However, there is no such thing. These high-yield securities do not exist.

Promissory notes: These are a way for companies raise money and can sometimes be an appropriate investment. But those that are sold broadly are usually scams, according to the SEC. When investors loan money to a company, they are promised a fixed-rate of income, usually very high, while the promised risk is low. To check an offer out, visit the SEC's EDGAR database, since promissory notes are securities and must be registered. The seller also has to be licensed to sell securities.

How to protect yourself

The most important thing to do is to make sure you have a qualified, honest financial advisor.

You also have to realize that no matter how intelligent you think you are, you can be conned, said Francvilla. "Look in the mirror and say 'you are pretty smart, but not perfect.'"

He also suggests to avoid making decisions out of fear or greed and keep your emotions in check. In addition, make sure you have done your research and are educated on the investment, and the person offering it to you.

And always trust your gut.

"The bottom line is, if it seems too good to be true, then it probably is," Mitchell said.

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