Ponzi schemes promise investors a high rate of return in a short span of time. It generates returns for earlier investors by obtaining new investors. The money that is collected from investors is used to pay the return. This scam actually produces the promised returns to earlier investors, as long as there are more new investors. This means the scam can run for some time, because investors appear to be making the promised return. These schemes usually fall apart when the new investments stop or a large number of investors ask to cash out.
How does this scheme works? Let me give you an example. Suppose the scheme promises a return of 10% per month. The scammer simply takes investors’ money and returns a tenth of it at the end of every month. Investors appear to be receiving the returns they were promised and thus encourages more people to put their money in the scheme. This can even encourage earlier investors to reinvest. This expansion is what makes Ponzi schemes successful. After a couple of months, the con artist have returned all the money invested by the earlier (assuming they did not reinvest), but will have most of the money invested by later investors. At this point the criminal simply takes the money,runs, and disappears.
Ponzi schemes come in all shapes and sizes. But here are a few red flags to watch out for. When an investment claims high investment returns with little or no risk. Every investment carries some degree of risk, and investments promising higher returns obviously involve more risk. Be suspicious if returns are very consistent. Investments normally fluctuate over time, especially those seeking high returns. If an investment continues to generate regular returns regardless of overall market conditions, be very wary. If you are always given an excuse of why you can’t review information about your investment in writing, most probably you have been deceived by this scheme. Remember to always read an investment’s disclosure statement before you invest. Be apprehensive if you don’t receive a payment or have difficulty cashing out your investment. More often than not, Ponzi scheme promoters encourages participants to reinvest promised payments by offering even higher investment returns. Be very careful. Make sure that the seller is licensed and the investment registered with state regulators before investing in any kind of way.