As long as there is a need for financial power, scam artists will always be there, looking to take advantage of loopholes and the unwary. In the past few decades, there has been a surge in the rate at which fraudsters scam innocent people of their hard-earned money. But why do scam artists succeed in tricking innocent, ordinary folks out of their money? For the most part, ignorance of the knowledge required to identify a scam is the leading cause. Many people blindly invest in projects that end up being fraudulent.
One such type of scam is a Ponzi scheme. But what is a Ponzi scheme? How does it work? And what are the telltale signs of a Ponzi scheme? Named after Charles Ponzi, a Ponzi scheme is an investment plan where investors are promised high returns with minimal or no risk. Typically, a Ponzi scheme, just like a pyramid scheme, works by generating income for the initial investors by using money invested by later investors. Ponzi and pyramid schemes differ in many ways, however.
Why Ponzi Schemes Always Collapse
It’s worth mentioning that Ponzi schemes always collapse at some point, and when they do, legal charges are brought forth by investors. For example, if you were involved in the GPB Capital lawsuit, you probably know how the GPB Capital Ponzi scheme collapsed.
Ponzi schemes always operate on meager earnings that are legitimate. Thus, they require a constant supply of money from new investors to pay earlier investors. In a nutshell, people or companies running Ponzi schemes always need “new” money to fund “old” money. Although some of these schemes can succeed in completing the circle for long periods, they never last. Once it becomes difficult to recruit new investors, a Ponzi scheme will eventually be exposed. Alternatively, a Ponzi scheme can collapse whenever a large number of investors decide to back out.
Red Flags Signalling a Ponzi Scheme
Whenever you are looking for an investment opportunity, it’s of the utmost importance to thoroughly scrutinize every opportunity. Not only should you determine whether a particular recruiter is legitimate, you should also do your due diligence in investigating the company itself. To avoid finding yourself in a Ponzi scheme, here are the common red flags you should be on the lookout for;
Low Investment, High Returns, and Minimal Risk!
Ponzi schemes are often designed to lure investors with the promise of high returns with minimal risk. Even worse, these schemes guarantee investors that they will get huge returns of up to 20 percent per annum.
However, if you know anything about investments, you know that there are no guaranteed returns when investing. Any legitimate investment opportunity comes with a certain degree of risk, leading to minimal returns or losses. On the positive side, a good investment will bring in good returns whenever the risk is low. Either way, you should avoid investing in opportunities that guarantee high returns from minimal investments.
Vague Investment Products
The nature of investment products is always unclear in a Ponzi scheme. In fact, in many cases, the Ponzi scheme swindlers don’t have any actual products at all. And whenever a product is available, it’s always based thousands of miles from the exact place that funds are being raised.
But why? Ponzi schemes always target investors who have little time or money to travel overseas to see their products. Whenever you find an investment opportunity with such vague investment products, chances are high that it’s a Ponzi scheme.
They Are Marketed as Risk-Free
Another common sign of Ponzi schemes is that they are often advertised as risk-free. As mentioned above, all investments involve a certain degree of risk. Therefore, if you come across a completely risk-free investment plan, then you can rest assured that it’s a Ponzi scheme.
Invest with Caution
Although authorities have busted Ponzi schemes over the years, you can always expect another one to pop up. The above tips will go a long way in helping you make informed decisions when investing.