Ponzi scheme is a type of fraudster scheme in which the investors are promised a high rate of returns with low risk. It is usually a money chain of pyramid scheme which generates a return to early investors with the help of investments from new investors.
If the scheme fails to attract new investors, the scheme eventually disappears due to the lack of funds. The main aim of the company involved in such a scheme is to attract new investors.
Origin of Ponzi Schemes
The Ponzi scheme is named after Charles Ponzi who started such a fraud scheme in 1920. During that period, the postal service developed an international reply coupon that includes the postage charges for the receiver to reply to the mail.
The rate of these reply coupons was different in different countries. Charles Ponzi found those investment plans and their price difference.
He collected investments from people and used them to buy reply coupons from countries with low prices and sold them in countries with high prices and planned to pay the investors with the profits.
But the plan didn’t work out as intended. As the number of investors increased day by day, Ponzi used the investment from the new ones to pay the old investors. When he was caught by the authorities, he had already earned millions using the scam.
How not to Fall into a Ponzi scheme?
- High returns with less risk: If an investment scheme promises a return of more than 15%, doubling or tripling your investment in a short span of time, then the scheme can be of a Ponzi nature. Ponzi schemes provide constant high payouts in the initial stages in order to attract new investments. As the investments dry out, the payouts will stop and the scheme dissolves.
- Guaranteed high returns: All the investments including the stock market and shares have ups and downs in their path. They are also not predictable in the future aspect. If a scheme provides a high guarantee about its future profit, it can be a Ponzi scheme because it is impossible to predict the future of an investment plan.
- About the Company: Before making an investment in a scheme, we should be completely aware of the company or the person behind the scheme. Check whether the company is registered under the government authorities and the person has the license to run such a venture.
- Details about investment: We should be completely aware of the mode of investment the company is following. It is better to not hand over your money if the investment plans are not clearly disclosed.
- Difficulty receiving payments: Many Ponzi schemes only allow the investors to withdraw the money if the profit reaches a predefined value or offers a higher return if the profit is also invested in the scheme. Try to stay away from such schemes.
There are many controlled and legal ways of investment available in today’s market. Make yourself aware of schemes that are trying to steal your investment. The main reason for the success of such schemes is investors who want to earn more money in less time. If fallen into one of them, your entire investment will be lost forever.