Binary options are securities in the form of options contracts that have a payout that depends on whether the underlying asset – for example, a company's stock or a stock index – increases or decreases in value. In such an all-or-nothing payout structure, investors are essentially betting on a stock price to increase or decrease with two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased/decreased over the fixed period, or no money at all. Unlike a traditional option contract, a binary option is not giving you the opportunity to buy an actual stock share, only the opportunity to bet whether its price will be above or below a certain amount at a designated time of day.

For example, you buy a "call" binary option contract for $30.00, betting that the price of a particular individual stock will be above $50.00 by a certain time of day. If at the designated time, the price of the stock is $50.01 or higher, your payout is a fixed sum of money, but if the price of the stock is $49.99 or lower, you lose your entire $30.00 investment. In reverse, you buy a "put" binary options contract for $30.00, betting that the price of particular individual stock will be below $50.00 at a particular time of day. If at the designated time, the price of the stock is $49.99 or lower, your payout is a fixed sum of money, but if the price rises to $50.01 or higher, you lose your entire $30.00 investment.

How to Ask and Check Before You Invest

Keep in mind that while thousands of companies promote binary options trading in the U.S., only a few are currently authorized to offer and sell by the CFTC. Contacting a securities or commodities regulators to verify registration information and backgrounds can help you make an informed decision.

To make certain the trading platform is registered with the U.S. Securities and Exchange Commission (SEC), visit the SEC's EDGAR database at https://www.sec.gov/edgar/searchedgar/companysearch.html.

Check the registration status and background of any firm or financial professional database of the National Futures Association (NFA): https//www.nfa.futures.org/basicnet/

Next, check out the CFTC's RED List, which contains the names of unregistered foreign entities that the CFTC has reason to believe are soliciting and accepting funds from U.S. investors at a retail level: https://smartcheck.cftc.gov/redlist/.

Also, you can check the securities registration status and background of the company and salesperson through the Investigator on Duty at the Arizona Corporation Commission's Securities Division.

Read more in a  NASAA Investor Alert on Binary Options or visit the Investment Fraud Prevention Center.

When you own a bond you have loaned money to a company or a governmental body that issues the bond to raise capital. In return, the issuer promises to repay the amount borrowed (face amount) plus interest. Bonds may be sold at prices higher or lower than their face ("par") value. Generally, the higher the yield on a bond, the higher the risk of financial loss. More specifically, investing in bonds may involve:

Call risk — the potential for the issuer to repay the bond before its maturity date, which may happen if interest rates decline. Many municipal bonds (those issued by state or city governments) are "callable." Thus, investors should learn more about the call provisions of the bond before buying it.

Credit risk — the possibility that the bond issuer may default, meaning it cannot repay principal and interest to the investor. Investors should research the credit rating of the bond issuer, but there is no assurance that an "AAA" rating guarantees a certain investment return.

Interest rate risk — the potential for the market value of the bond to decline, if interest rates rise. Given that investors are attracted by higher rates, when the bond being sold offers a lower interest rate than the market, the bond is less desirable and therefore, less valuable.

Inflation risk — the potential for the market value of the bond to decline, if consumer prices increase. Inflation reduces the purchasing power of the dollar, which means investors who receives a fixed rate of return can buy less goods and services for their money.

Liquidity risk — the risk that there may not be an active market in which to sell the bond to another investor. Because the market for a particular bond may not be "liquid," prices quotes for the same bond may be different.

Read more about the various types of bonds and the risks associated with them before you invest.

Derivatives are financial products based on an agreement between parties where the value is "derived" from the price of an asset (stock, bond, or foreign currency), the value of a financial index, or the rate charged for an activity, such as borrowing money.

Basically, derivatives transfer the risk from those less willing or able to sustain possible financial losses to those more willing or able to manage the risks. However, if not used appropriately, derivatives can cause significant financial losses for investors. Some derivatives are sensitive to changes in the values of the underlying assets, which means that the value of a derivatives portfolio can deteriorate quickly and be difficult to predict. Generally, derivatives trades on organized exchanges are more liquid than those that are highly customized and traded in Over-the-Counter (OTC) markets.

Before you invest, investors need to know that derivatives are sophisticated financial products and that they should exercise great caution before investing. Obtain important background information about firms offering futures contracts from the National Futures Association (NFA) at www.nfa.org. As part of your due diligence, read more about the different types of derivatives and how they work.

ETFs are baskets of investments such as stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments that are created to mimic the performance of an underlying index or sector.

Retail investors are purchasing ETFs as an alternative to mutual funds and other investments. Unlike a mutual fund, which is bought and sold directly from the fund issuer at the fund's net asset value (NAV)—a price set at the end of each trading day—an ETF is bought and sold on an exchange like any listed stock at a price continuously determined on the exchange.

Depending upon the type of ETF, an investor's risk of financial loss can vary. With leveraged or inverse ETFs, for example, there are derivatives involved, which carry a higher degree of risk than traditional ETFs.

As part of your due diligence, view an Investor Alert on the various types of ETFs before you invest.

Foreign currency exchange rates, commonly known as "forex," are the costs to exchange one country's currency for another country's currency. Since currency exchange rates fluctuate, traders can participate in the forex market as speculators (individuals and companies who buy and sell foreign currencies) hoping to profit from changes in the currency rates.

Forex contracts involve the right to buy or sell a certain amount of a foreign currency at a fixed price in dollars. Most forex trading is by governments and large institutional investors concerned about fluctuations in international exchanges rates. Individual investors comprise a small segment of the forex market. Thus, the average investor needs to be wary since, like any investment, forex offers can be subject to abuse and fraud.

No matter how it may be promoted, forex trading is a risky endeavor and may not be suitable for every investor. Like any investment, forex investments can be subject to abuse. Some promoters profit by charging high commissions or selling investment strategies. Others claim to have complex algorithms or propriety software programs that allow them to beat the market, which really don't work or don't exist.

Disclosure Documents 

Some FOREX operators pool your investment with the money of other investors to create an investment fund. Your equity or debt interest in the investment fund is considered a security and is subject to securities registration requirements.

The forex fund must provide all prospective investors with an extensive disclosure document. Commonly referred to as a Private Placement Memorandum (PPM) or Private Offering Memorandum (POM), the issuer of an investment fund should provide a disclosure document to all prospective investors that thoroughly explains all material information about the investment. Typically, this document is quite lengthy and should contain the following information:

• Detailed information about the investment strategy
• The risks associated with the investment strategy
• The use of investor funds
• Background information about the principals and managers of fund
• The compensation that will be paid to the principals, managers, and solicitors
• The fund’s business and operating history
• The fund’s track record and trading history
• Audited financials of the fund

Unlike forex dealers, individuals and companies that solicit retail accounts for forex dealers and manage those accounts, may not have to be regulated or affiliated with a regulated company, which exposes the investor to additional risk. Additionally, some promoters profit by charging high commissions or selling investment strategies. Others claim to have complex algorithms or propriety software programs that allow them to beat the market, which really don't work or don't exist. No matter how it may be promoted, forex trading can be a risky endeavor not suitable for every investor

Read more about how to recognize the warning signs of a FOREX fraud.

Ask and Check Before You Invest

You can obtain important background information about forex dealers and their salespeople registered with the Commodities Futures Trading Commission (CFTC) through the National Futures Association (NFA) at www.nfa.org or by calling 1-800-676-4632. 

"The U.S. Commodity Futures Trading Commission (CFTC) warns investors to take precautions in protecting themselves from the many varieties of commodity frauds that are taking place in today's trading markets. The CFTC is the federal agency charged with regulating the commodity futures and options markets in the United States. We have seen a significant increase with the number of scams that falsely promise high profits with minimal risks. Many of these scams target ethnic communities in their language, from New York to Florida and from the Southwest to California, and also in other areas. "

As part of your due diligence, read more about FOREX investing and the questions you should ask before you invest.

A limited partnership agreement is a contract that creates a partnership between the general partner and those who finance the business, the limited partners. A limited partnership can consist of as few as two people or parties — a general partner, who may or may not invest in the partnership, but who manages or controls it, and one or more limited partners, who provide the capital to fund partnership.

Limited partners are passive investors — their participation is limited to the profits or losses of the venture. Limited partners give control of their invested funds to the partnership, with decisions made on behalf of the partnership by the general partner. Thus, limited partnerships interests are securities.

Not only are the limited partnership interests securities, but sometimes the business of the limited partnership is investing in securities. For example, hedge funds are sometimes limited partnerships. The partnership raises money by selling limited partnership interests and then uses the money raised to invest in securities. In Arizona, the general partner of a limited partnership that invests in securities may be an investment adviser and may need to licensed under the Investment Management Act.

Read more about Limited Partnership Interests before you invest.

Shares of microcap or "penny" stock represent fractional ownership of a corporation in companies with limited assets or "capitalization." Typically, microcap stocks are low-priced and are traded in low volume at either of two over-the-counter (OTC) markets--OTC Bulletin Board and the Pink OTC Markets, commonly known as the "pink sheets."

Unlike the common and preferred stock traded on the major stock exchanges, microcap stock lacks substantial public information about the company. Because public information about the company is limited, microcap stock can be subject to abuse by unscrupulous stockbrokers or con artists.

While all investments involve risk, microcap stock companies are at the higher end of the risk spectrum since they tend to be new companies without substantial assets or established business operations. Also, because microcap stocks trade in low volume, any sizable trade can have a significant impact, increasing price volatility.

Read more about how to obtain information about microcap companies and avoid being scammed.

A mutual fund is an investment company that pools the financial resources of many investors to buy securities. Investors buy and sell mutual fund shares directly from or back to the fund itself or through a securities dealer. While mutual funds offer advantages, including professional money management, diversification, affordability, and liquidity, investors need to be aware of certain disadvantages:

Price uncertainty — investors place an order, but share price is determined at the end of the trading day and not in "real time" like shares of stock.

Lack of control — investors have no input as to how assets in the portfolio are allocated and when securities are bought and sold.

Cost despite negative return — investors pay sales charges, annual fees and other expenses regardless of the fund's performance.

Also, many mutual funds offer multi-class structures which can affect an investor's performance results. Prior to selecting a certain mutual fund class, investors need to assess their individual investment goals and objectives, including how long they intend to stay invested in the mutual fund.

Before you invest, consider these other tips about investing in mutual funds:

• Review all fees and charges. Front-end loads charge a fee when you buy; Back-end loads charge a fee when you sell; No-loads don't charge a sales commission, but charge a management fee. Read more about fees associated with mutual funds.
  
• Do some comparison shopping. Since funds vary in terms of fees and charges, use the mutual fund analyzer to compare and contrast the costs of each fund.
  
• Be aware of "breakpoint selling." Most mutual funds offer a reduced sales charge when you buy a certain number of shares, which can be found in the prospectus under the heading called "sales charges" or, simply ask your investment professional about the fund's specific breakpoint.

Read more details about understanding mutual funds and share class options before you invest.

Oil and gas investments take many forms, including limited partnership interests, ownership of fractional undivided interests in leases, and general partnerships. Generally, the lease holder or land owner has an overriding interest in the well. Investors, hoping the well or wells will be productive, share proportionally in the profitability of the venture.

Generally, oil and gas interests are considered to be very speculative, highly illiquid investments with a long holding period. This type of investment is not suitable for everyone.

Like any investment, oil and gas investments can be subject to fraud. Fraudsters will go as far as to show potential investors the plot of land where the drilling will occur, and after a few initial investors buy in, those funds are "recycled" to make it appear as though dividend payments are flowing.

Read more about oil and gas investments and the questions you need to ask before you invest, including an informed Investor Alert on energy investments.

There are multiple ways to invest in precious metals, whether it is buying the actual gold, silver, and platinum, for example, or making metals-related market investments in mutual funds, exchange-traded funds and futures, as well as shares of precious metals mining companies.

Regardless of the type of investment, investors should understand the following risks:

• Precious metals are commodities where prices can fluctuate dramatically, sometimes even more than the general stock market;
• Precious metals may not provide long-term investment returns; and
• Precious metals are high-risk, speculative investments.

Also, investors should beware of "exploration" companies. Some may offer official-looking geological surveys or financial statements, when in reality there is little or no current production. In one typical scenario, the promoter claims to have exclusive mining rights to profitable mines, but in actuality, the company does not have any mineral rights to the land or is defunct. In many instances, the amount of ore in the soil is so minuscule that extraction is not economically feasible.

In another typical scenario, the promoter, while touting a geology degree and decades of industry experience, points to a revolutionary process to extract precious metals from anything from volcanic cinders to sediment clay used to make kitty litter. Investors are encouraged to cash out of their poor performing investments and switch to the new, precious metals investment, which may be nothing more than "fool’s gold."

Read more about mining investments and what questions to ask before you invest.

Private placement offerings allow companies to raise money without having to comply with the registration requirements of a public offering.

Although private placement offerings may offer substantial returns, they may be high-risk investments that might not be easily resold to other investors on a secondary market. These type of private investments are only reserved for accredited investors (individuals or companies who have sufficient wealth to withstand a financial loss) and a limited number of sophisticated investors (individuals who have the experience and sufficient access to knowledge in order to make an informed decision).

Keep in mind that companies raising money through private placement offerings often have a limited operating history and typically have more modest revenue streams than larger, more established companies. Because private placement offerings are not reviewed by regulators, they should be carefully examined prior to investing.

For more information, read an investor alert on private placement offerings issued by the U.S. Securities & Exchange Commission (SEC).

A promissory note is a form of debt issued by a company to raise capital. In return for the loan of money, the company agrees to pay the investor interest over a specific time period. The interest may be paid during the time period of the note or at the end. There are two major types of promissory notes—secured and unsecured. Secured promissory notes have collateral behind them to secure the loan. Unsecured notes might have a personal guarantee but no valuable collateral, which carries a higher degree of risk of financial loss.

Promissory notes are only as sound as the companies or projects they’re financing. Even promising companies can fail because of competition, bad management decisions or unfavorable market conditions. Promissory notes may be subject to regulation and individuals who are selling the notes may need to be registered or licensed.

Generally, promissory notes that are broadly marketed to the general public should be examined closely by the investor. Here are some warning signs:

Insured or guaranteed returns. With promissory notes, the higher rate of return, the higher risk of financial loss.

Above-market interest rate. A return on investment that is different from other similar investments should raise questions.

A start-up with “prime quality” notes.  In the securities industry, prime quality means  a company has an established history of operations and earnings. 

Limited time period to act. Legitimate salespeople want you to take your time, ask questions and do some research.

Name-dropping of other investors. This is merely a persuasion tactic to convince you to invest.

“Out-of-the-blue” contact. Strangers emailing or calling you about investing in promissory notes is suspicious. Feel free to hang up or hit delete.

Lack of audited financials. Be cautious about investing in a company that cannot produce an audit by a certified public accountant.

Read more about promissory notes and the risks associated with them before you invest.

For Issuers
When you borrow money, you are selling a note to the person or company lending you the money. Both the Federal Securities Act of 1933 and the Arizona Securities Act define the term "security" to include "any note." Both acts include in their definition, however, the phrase "unless the context otherwise requires." In some contexts, the courts have determined that a note should not always be considered a security. An analysis of court interpretations is in order to understand when a note may not be a security, which is a time-consuming and complicated task.

Further, the Arizona Supreme Court has said that all notes are securities and must register unless the Arizona Securities Act provides an exemption.* Many transactions in which you borrow money (sell a note) are probably exempt from registration requirements because they are private placements, which include borrowing money from a close relative or borrowing money from a bank or savings institution.

The main point you need to know is that when selling a note, you may be creating a security. Thus, before you even attempt to "sell" a note within or from Arizona, you should consult with a licensed attorney knowledgeable in Arizona's securities law.

Your interest in a real estate investment opportunity may begin with a trusted family member, friend, neighbor or business associate who approaches you to talk about some impressive financial gains. An advertisement in a popular newspaper or online service catches your eye with a promise of guaranteed returns secured by an interest in a piece of real estate.

A general rule of thumb with which to start is that if you as the investor are not in control of the real estate transaction and are expecting a return on your money, the transaction probably involves a security. Because the investment may involve a chunk of your life savings, consider consulting with an attorney knowledgeable in securities law to provide a legal interpretation for you and evaluate any exemptions claimed by the promoter.

What you may not realize is that some of these investment opportunities may be unregistered securities or worse yet — scams. Whether a real estate investment is a security or not is not always easy to determine and depends upon the unique facts and circumstances of the transaction and not on what a promoter calls the investment product.

Read more about risks associated with real estate as a security before you invest.

A variable annuity is a contract between an investor and an insurance company where, in return for a lump sum payment or a series of premium payments, the insurance company agrees to pay to the investor a lump sum or a stream of income based upon the performance of an investment account (stocks, bonds or other types of investment products), less any applicable charges and fees. Because your investment account is subject to the ups and downs of the securities markets, the value of your variable annuity can vary.

Is a variable annuity right for you? To answer this question, you should carefully consider a variety of factors--your financial goals, investment amount, timing and holding period of the annuity. Be aware that variable annuities are not liquid investments, but are designed to be long-term investments associated with surrender penalties if you need to withdraw your money before the annuity contract has matured.  Read more detail in the NAIC-Deferred_annuities_Consumer_Guide.

Also, contact your tax professional about any possible negative consequences of buying or switching to an annuity from another type of investment; or if the annuity interferes with your eligibility for medical care or housing assistance programs.

To protect yourself against deceptive sales practices, read more about variable-annuities before you invest, including these helpful tips in the  Guide_to_Annuities_for_Seniors-DIFI from the Arizona Department of Insurance and Financial Institutions.  

In a viatical or life settlement contract, an investor purchases the right to receive a portion of the death benefit of a life insurance policy or pool of policies. The investor may become a beneficiary of the policy or, less frequently, an owner of the policy. The insured receives a percentage of the face value of the insurance policy.

This type of investment is referred to as a "viatical settlement" when the insured suffers from a terminal illness; and a "life settlement" when the insured is a healthy senior citizen. Regardless of the condition of the insured and terminology, both investments work in the same manner. Viatical and life settlements can be legitimate investments and are often promoted as a way for people to do a "good deed" for humanity, providing much-needed financial resources to a family drained from caring for an elderly or terminally-ill person.

In Arizona, viatical or life settlements must either be registered or comply with specific disclosure requirements within the Arizona Securities Act. An individual who sells viaticals is required to be registered with the Securities Division as a securities salesman.

While there are sound, reputable companies that offer viatical or life settlements, commonly known as "viaticals," these investments pose high risks of financial loss and are fertile ground for abuse by unscrupulous individuals. Viaticals are risky investments for multiple reasons:

• Lack of liquidity — Investor receives a return only when the insured dies and the death benefit is paid.
• Rate of return is not guaranteed — Investor's return is dependent when the viator/insured dies, which is very unpredictable. Medical advances can further complicate the estimation of life expectancy.
• Life expectancy estimate may be inaccurate — The person who is predicting the insured's life expectancy may not have the knowledge and experience to provide a realistic estimate.
• Death benefit may not be paid — The insurance company may not pay the death benefit if the policy was obtained fraudulently and the contestability period has not expired. The policy may lapse if the premiums are not paid.

Read more about viaticals and the questions you need to ask before you invest.

What is virtual currency?  Unlike traditional currency, these alternative currencies are not typically backed by tangible assets, are not issued by a governmental authority and are subject to little or no regulation. The value of virtual currencies may be highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts. Investors should be aware that investments that incorporate virtual currencies present very real risks.

The Commission’s Securities Division urges investors not to make substantial investments into this type of risky investment without first considering some important issues. Some common concerns investors should consider:  

• Virtual currency is subject to minimal regulation, susceptible to cyber-attacks and there may be no recourse should the virtual currency disappear.
• Virtual currency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.
• Investments tied to virtual currency may be unsuitable for many investors due to their volatility.
• Investors in virtual currency will be highly reliant upon companies that may lack appropriate internal controls and may be more susceptible to fraud and theft than other financial institutions.
• Investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect their e-Wallets from theft.

Virtual Currencies as an Investments

Commodities—Cryptocurrencies or virtual currencies can be used as an investment in essentially the same way as gold and other commodities. Investors can buy virtual currency with the expectation of being able to sell them at a higher price in the future. This can be highly speculative since the value of virtual currencies can fluctuate dramatically in the same day and each exchange can value the virtual currency differently. For details, see a NASAA Investor Alert: Commodities-Are You An Informed Investor?. 

ETF—A traditional Exchange Fund (ETF) tracks a basket of stocks or a commodity and trades in a stock market. An "ETF" can be composed only of virtual currencies, each with a value that fluctuates differently. For details, see a NASAA Investor Alert: Exchange-Traded Funds (ETFs)—Are you an Informed Investor? 

Derivatives—A derivative is a financial product with a value that is derived from a principal asset (such as stocks, bonds, or "Bitcoins") as contained by agreement between the parties. The most common types of derivatives are futures, guarantees, convertible bonds and exchange or exchange agreements.  In those cases, the investor bets on the change in the price of the virtual currency. For details, see Derivatives—Are you an Informed Investor?. 

For more information about the risks virtual currency as an investment, read the Corporation Commission's Investor Alert on Virtual Currency and visit the Fraud Prevention Center. Also, check out Initial Coin Offerings (ICOs)—What to Know Now and Time-Tested Tips for Investors | FINRA.org

A limited liability company (LLC) is structured similarly to a limited partnership, but participants are called members rather than partners.  In a manager-controlled LLC, the managing member--just as a general partner--controls all the affairs and finances of the company.  All the other contributing members simply provide the capitalization for the business with the expectation that they will receive a profit on their investment.

Not only are the ownership interests of a manager-operated LLC considered securities, but also the business of the LLC can be investing in securities.  For example, hedge funds are sometimes limited liability companies.  The company raises money by selling membership interests and then uses the money raised to invest in securities.  In Arizona, the manager of an LLC that invests in securities may be an investment adviser and may need to be licensed under the Investment Management Act.

NOTE:  The organizer(s) of a limited liability company need(s) to review the exemptions provided from Arizona securities laws by Section 44-1844.A.10.