How To Avoid Ponzi Schemes: Red Flags To Look For

Are you looking into side hustles? While all of us need to “get wealthy quick,” if something sounds too good to be true, it just is likely to be. In this text, we’ll cover exactly the best way to avoid Ponzi schemes — faux investment opportunities that may quickly leave your bank balance within the red.

Learning the best way to spot a scam is very important if you’re considering investing your money.

So let’s take a have a look at how these schemes work, specific examples of them, and detail the red flags it’s good to concentrate on.

First up, what’s a Ponzi scheme?

Likelihood is, you’ve heard the term Ponzi scheme, but do you understand what it means?

Ponzi schemes are fake or fraudulent investments that encourage investors to pay into and in turn earn regular returns.

While legit investment schemes offer returns from real profits, the cash first investors get back in Ponzi schemes actually comes from subsequent latest investors. With the initiator of the scheme raking in the majority of the investments for themselves.

The hoax takes its name from Charles Ponzi, a Boston-based con man who defrauded investors back in 1920. Since there isn’t a real investment opportunity, to survive, the schemes have to repeatedly attract latest investors to offer the returns stream.

A high-level answer to the query, “what’s a Ponzi scheme?” is that Ponzi schemes are dangerous. They arrive crashing down once they can not attract latest investors. That’s when most previous investors will lose their money completely.

With that said, learning the best way to avoid Ponzi schemes is incredibly essential as they will be hard to decipher so keep reading!

Famous examples

Now that you understand what a Ponzi scheme is, let’s take a have a look at a few probably the most famous examples. Listed here are a few of history’s best-known scams:

Charles Ponzi

While Charles Ponzi was not the primary person to run a scheme of this nature, the name of such cons comes from him. To draw potential investors, he promised people a 50% profit inside the first 45 days of shopping for in or a 100% profit inside the first 90 days.

He claimed that the scheme meant buying discounted postal reply coupons from abroad after which redeeming them in America to take advantage of the value difference.

Nonetheless, in point of fact, he was merely using latest investors’ money to repay older investors.

Reed Slatkin

The previous Church of Scientology minister, Reed Slatkin, networked his approach to financial gains and robbed 800 clients of virtually $600 million within the Nineteen Eighties.

The con lasted around 15 years and it wasn’t until 2003 that he pleaded guilty to defrauding his list of investors.

Reed Slatkin told potential investors — including his close friends and even movie stars — that he was investing their money.

Nonetheless, the money was going directly into the Church of Scientology. Any returns that investors received got here from latest investors’ pockets.

Bernie Madoff

Bernie Madoff is an American financier who pulled off the most important Ponzi scheme in history thus far. Unbelievably, the scam lasted 17 years and he managed to defraud tens of hundreds of investors out of around $20 billion.

He attracted investors by claiming to make use of the “split-strike conversion” which is a legitimate trading strategy. In fact, he was not using this approach in any respect.

As an alternative, he was putting the entire investment money into one checking account and using it to repay old investors.

The cash pot soon ran dry when he didn’t attract latest investors and Madoff was discovered. He was sentenced to a large 150 years in prison and died in prison in 2021.

Tom Petters

CEO and chairman of Petters Group Worldwide, Tom Petters, executed a $3.7 billion Ponzi scheme.

Investors believed their funds were buying retail merchandise, generally electrical goods, which could be sold to discount stores at a profit.

Nonetheless, Petters was not investing any of the cash; he was using it for one in every of two things. A part of the money went toward funding his lavish lifestyle and the opposite part went toward paying off latest investors. In 2010, he was sentenced to 50 years in prison.

The examples provide insights into Ponzi schemes to avoid. But not to fret, we’re going to get into much more detail so you might be fully aware!

Ponzi schemes vs. Pyramid schemes

Pyramid schemes and Ponzi schemes have quite a bit in common — they each lure investors in with false guarantees and ultimately end in financial loss.

Nonetheless, there’s one big difference between these two forms of schemes, and that’s how the income streams work.

Ponzi scheme income structure

With a Ponzi scheme, the high “returns” that investors get come from latest investors pouring money into them. Nonetheless, the investors imagine that the returns come from a  legitimate source.

For instance, they could be led to imagine that the funds are being invested in latest corporations, merchandise, or other types of trading.

Every time a brand new investor comes aboard, they’re given the identical information and told that they are going to get wealthy quickly.

Their payments function an income stream to pay previous investors. This particular cycle continues until there are not any latest investors and it crashes.

Pyramid scheme income structure

Then again, with pyramid schemes, latest investors must recruit other investors themselves to maintain the so-called profits coming in.

Often enough, the main target of those schemes is on constructing a “team” and recruiting latest people to the corporate. The more people you recruit below you within the pyramid scheme, the more cash you’ll get.

When you may have invested in a pyramid scheme, you’ll earn money by recruiting people. There could also be a product that you just are all selling.

For example, it’s possible you’ll be selling beauty products, clothing, or dietary shakes — but the true money comes from latest recruits.

The way to avoid Ponzi schemes

It literally pays to be vigilant when investing. When a chance comes your way promising fast returns, it’s possible you’ll be blinded by the sunshine.

It’s one thing to grasp the query, “what’s a Ponzi scheme?”. Nonetheless, if you happen to don’t fully understand the investment and the way it really works, you must avoid it just like the plague.

Luckily, learning the best way to avoid Ponzi schemes — and knowing what the red flags are — will enable you to to guard your funds. Let’s take a deep have a look at what it’s good to know.

6 Red flags to look out for

Determining whether an investment opportunity is legitimate doesn’t must be hard. You just must do your research. To guard yourself from these schemes, you have to be wary of the next signs:

1. It’s a “once in a lifetime” opportunity

When the investment representative first reaches out to you, they could inform you that it is a “once in a lifetime” opportunity to turn into wealthy.

It sounds too good to be true… and it’s. If the person is making big claims that this investment will change your life, watch out what you sign.

2. The allure of high returns

Every investment you make carries a component of risk. There are not any shortcuts here. So, when an organization is offering you a “low risk” and “high return” package, it’s good to ask yourself why.

It’s likely that this particular opportunity is just not as solid because it first sounds.

3. The promise of consistent returns

Each time you invest money, your investment will rise and fall. That’s natural. Depending on the chance level, you would possibly see some real peaks and extreme lows.

If an organization suggests you can consistently make high returns on a month-by-month basis, that’s a red flag.

Ponzi schemes can offer this level of consistency within the short term. That’s since the revenue comes from latest investors who join the scheme.

Put simply, the scam is just not affected by changes available in the market. If that sounds familiar, steer well clear of the con.

4. The corporate processes are a mystery

Are things shrouded in mystery? While we’re on the subject of transparency, it’s essential to grasp how the investment process works.

If the investment representative offering you this chance says that the strategy is “complex” or “secret,” it is advisable to run for the hills and avoid this Ponzi scheme.

If you happen to’ve asked for more details about how the system works and the rep is being shady, that ought to be enough so that you can back out. Protect yourself and your funds. 

5. You’re pressured to make a call

If the representative is continuously asking you to make a call, you may have to wonder what the hurry is all about.

Often, Ponzi scammers will use this tactic to coerce people into making poor decisions. When there’s a closing date in your investment, it’s good to wonder why that’s.

6. You’re not getting paid on time

Should you may have already joined the scheme, be wary if you happen to struggle to “money out”. If there’s at all times a suspicious reason you can’t get your returns, which may be a red flag.

While technological problems do arise on occasion, it’s good to be cautious.

The way to report a Ponzi scheme

It’s not simply about learning the best way to avoid Ponzi schemes. These scams damage people’s funds and may break their lives. For that reason, you must at all times report them.

It doesn’t must take too long, either. You may log on to report fraudulent schemes to the local government or the federal government.

Ensure you may have as many details concerning the Ponzi scheme as possible before you begin as you will want them.

Except for the governmental routes, you may as well report the scheme to one in every of the various fraud investigators.

These professionals may have the option to look into the claim, offer solid expert-backed advice, and investigate the priority level of the investment fraud:

When you may have submitted your initial report, be sure that you just follow up. Whether you may have been affected by the scam or otherwise, it pays to be sure you get some results.

Recognize the signs and avoid these schemes!

Now you may have key information on the best way to avoid Ponzi schemes in addition to recommendations on the best way to discover the signs. Remember, investing isn’t ever a guaranteed quick and simple path to extra income.

If someone out there’s telling you otherwise, they could be attempting to scam you. Each time you’re considering an investment, be sure that you just look out for the red flags that we’ve got listed.

Finally, you’ll want to leverage our free courses to learn exactly how investing works the legit way!