This post may contain affiliate links. If you purchase through these links, we may earn a small commission at no additional cost to yourself.
Still, many investors are now finding themselves at a loss because they were duped by investments that appeared to be legitimate.
Here are some basic tips and warning signs, so you won’t be taken advantage of or caught up in a Ponzi scheme…
What Are Ponzi Schemes?
Ponzi schemes are named after Charles Ponzi who was one of the most famous con men in American History. He invented the scam that pays initial investors with proceeds from new investors under the guise that they are making an actual business investment, when in fact the underlying business is non-existent or unsuccessful. Eventually, there are not enough newcomers to pay the existing investors, and the scheme falls apart.
Ponzi was also one of the first people to sell Florida swampland as real estate.
The U.S. Securities and Exchange Commission describes a Ponzi scheme as a business model that "works on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses."
Pyramid schemes also fall under this kind of model as "participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same."
Ponzi schemes don’t only come in the form of multi-million dollar deals and losses. It is much more likely that small investors will lose anywhere from a few hundred dollars to a couple thousand dollars in a small-scale investment opportunity.
Warning Signs Of A Ponzi Scheme
In a tough economy, more and more people fall prey to these schemes in hopes of making easy money. Most do not understand that the "easy money" they are going after is indeed a faulty scheme and they are the innocent victim.
They fail to see the warning signs of a Ponzi scheme:
- Unclear business model with a lot of smoke and mirrors where the business withholds information on profits and how the business is run.
- Aggressive sales techniques that use testimonies of others who got incredible returns on their money with no other substance.
- Investment opportunities that asks you to spread the word and bring in more investors.
- If it sounds too got to be true… it is. You can’t generate double digit returns year after year regardless of the how the market is doing.
- If you are promised guaranteed returns. There is a risk with any investment and that should be made clear.
- If you feel bullied when you ask too many questions.
- Stalling when you ask to withdraw returns
Many of Ponzi schemes are successful becuase they give you the impression "if you don’t understand it, then you are unintelligent." For this reason, people are reluctant to ask too many questions.
You should never be afraid of looking stupid when you are investing your money. If the business does not make sense, you should be able to take the information to a financial advisor or lawyer who can make sense of it before you invest. If there is secrecy involved, or if it is too confusing to understand, you should walk away.
I have been a certified tightwad striving for financial freedom since I became pregnant with my first child — and I decided to find a way to stay home with him full-time. I enjoy sharing my personal experiences in my journey back to financial health and planning for a future — which will include sending 2 kids to college and early retirement.