What is a Ponzi scheme?

What is a Ponzi scheme?
What is a Ponzi scheme?

During the recent past, you must have heard a lot of news about Ponzi schemes. They guarantee exciting promises but lead people towards frustration and hassle in the long run. Therefore, it is important for all people to have a clear understanding about “What is a Ponzi Scheme”. Then you will get the opportunity to avoid frustration linked with them.

What is a Ponzi scheme?

A Ponzi scheme can simply be defined as an investment fraud. It promises amazing returns for all the investors. In fact, investors are convinced that they will be provided with amazing returns via the funds that are raised from newly joined investors. Due to this reason, existing investors would be tempted to get new investors into the scheme as well.

For a Ponzi scheme to work, it should have a continuous flow of investors. In such a situation, organizers of the Ponzi scheme will be able to win a higher amount of money within a short period of time. But when the Ponzi scheme fails to recruit new investors, it will collapse.

The first ever Ponzi scheme was started back in 1920 by a guy named Charles Ponzi. He cheated thousands of people who lived in New England by promising them to deliver 50% of their investments within 90 days. Since then, Ponzi schemes have evolved along with time. Therefore, it is important for the people to have a clear understanding on how to avoid them.

What can you do to avoid Ponzi schemes?

  • Always be skeptical

If you are approached by an individual who tries to sell a massive investment, you should be skeptical about it. The investment scheme would look promising. In other words, it would convince you that you will be able to get amazing returns without any risk. This is a common example in a Ponzi scheme. When you are provided with such an investment plan, you should be extra cautious. In most of the cases, returns would be generated by a thing that you haven’t heard before. Or else, you would think that it is impossible to generate such returns via the method explained. If you don’t have any idea at all, you are encouraged to go ahead and seek the assistance of someone who has experience and knowledge about the subject.

  • Be suspicious when you come across unsolicited offers

During a Ponzi scheme, a person would get in touch with you unexpectedly. For example, you will be asked to come and take part in an investment seminar. You should always a look at such instances with a suspicious eye. If you are a senior citizen, you should keep in mind that you are at the high risk category of being subjected to investment scams. People in your age category are more vulnerable to such scams as well. Therefore, you need to be suspicious when you are provided with an unsolicited offer.

  • See whether the investment opportunity is a registered one or not

Once you are provided with an investment opportunity, you should see whether it is registered or not. Usually the Ponzi schemes are unregistered. They will not be provided with registration by the controlling authorities due to the nature. You can simply ask for additional information about the investment from the individual who promotes them to you. If that person tells you that the investment opportunity is not registered, you need to inquire why it is not. It is true that an investment opportunity doesn’t need to be registered at all times. However, moving forward with a registered investment opportunity would provide you with the opportunity to keep peace of mind. It can also keep you away from fraud Ponzi schemes. Therefore, it is a must for you to see whether the investment is registered or not.

  • Analyze the seller

The seller who’s trying to promote the investment opportunity to you should also be analyzed properly. If you get in touch with FINRA, you will be able to get additional information about the seller. In here, you need to see whether the seller has obtained required licenses. In addition, you should keep an eye on all sorts of negative information about the seller as well. If there are negative remarks or if the seller has not obtained required licenses, you should never go for the investment opportunity. There is a high chance associated with it to be a Ponzi scheme and it’s better to be safe.

  • Be 100% sure about the investment before you spend money

Most of the people in today’s world do the mistake of spending their money, before they get 100% sure about the investment opportunities. This can be considered as one of the most prominent reasons why people become victims of Ponzi schemes. If you don’t understand any part of the investment opportunity, you should ask for additional information. Plenty of resources are available on the internet for you to get required information. By going through those details, you will be able to get a better understanding on how to invest your money. Then you can also evaluate the opportunities that are provided to you. This would improve your knowledge about Ponzi schemes as well and you will be able to stay away from them.

  • Report the Ponzi schemes that you come across

Last but not least, you need to be careful to report all the Ponzi schemes that you come across in day to day life. By going this, you will get the opportunity to save another person from becoming a victim of it. As soon as you come across a Ponzi scheme, you need to file a case with the FINRA. Or else, you can get in touch with Securities and Exchange Commission to do it. When you report the Ponzi Scheme, you will be ensuring that you save lots of other people from falling into the trap as well.

Final Words

Now you have a clear understanding about the answer to the question “what is a Ponzi scheme”. Any person can become a victim of a Ponzi scheme. Hence, it is extremely important to keep your eyes open and make sure that you don’t become a victim. Now you have a clear understanding on how to avoid the frustration associated with Ponzi schemes. As the next step, you need to keep an eye on the Ponzi schemes around you. If you come across any, you should be careful to stay away from them.

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