What Is a Ponzi Scheme?

When it comes to investing, an ability to spot schemes and possible fraud is an important key point to keep in mind. There are numerous types of scams that exist in the world of investments but perhaps no other is quite as bold as a Ponzi scheme.

A Ponzi scheme is a form of fraud that is characterized by fake investments at the hands of a scam artist. The schemer persuades a series of investors to invest in a fake company and proceeds to pay back small shares from the funds being invested to conceal the scam.

A Ponzi scheme can take on many different exteriors, yet the same type of fraud is always at play. Let’s take an in-depth look at the dynamics of a Ponzi scheme.

Why Is It Called a Ponzi Scheme?

The scheme gets its name from an Italian swindler by the name of Charles Ponzi who convinced a large number of New England residents to invest in a fake postage stamp investment in the 1920s.

The scam was so shocking and became so infamous that the name Ponzi was affixed to any scam that involved fake investments with no return promise on revenue to the investors.

How Do Ponzi Schemes Work?

Ponzi schemes work because the scammers rely on the inexperience of easily-recruited investors into the fake company. Investors who respond positively to scheming organizers frequently convey too much trust and lack of investment knowledge when they fall for a Ponzi scheme, which is why it is important to thoroughly research an organization before commitment.




The scheme operates solely on revenue from investors which is in turn paid back to other investors with no company growth or earnings to show for. It is a repeating cycle of dwindling profits and returns that yield no growth that typically causes investors to become suspicious and seek to cash out, which is the end of the scheme as the swindler(s) have nowhere left to hide at this point.

Ponzi Scheme Examples

A Ponzi scheme can be small or massive, with the scheme operating under the name GPB Capital being a notable example. This Ponzi scheme saw a large number of wealthy investors drop revenue into the unbalanced company with the promise of an 8% return on said investments.

A Ponzi scheme doesn’t need to be small and unassuming to be a scam; high-level executives and brokers can execute a scheme with much more believability to the unassuming investor.

Conclusion

This was a brief overview of what a Ponzi scheme is and the many forms that a scheme of this nature can take on. To avoid falling victim to a Ponzi scheme, be sure to avoid suspicious sellers. If an organizer is not licensed or sounds vague and sketchy in their pitch, do some further research before making a commitment.

Be aware of terms like “no risk”; there is always risk involved in investing. If something seems off, always trust your gut instinct.