Let’s know about the Ponzi Scheme before starting the entire conversation. So what does the term Ponzi Scheme mean? A Ponzi scheme is a type of deception in which cash from more recent investors is used to pay gains to previous investors. Victims are led to believe that profits are generated through legal business activity, and they are ignorant that funds are coming from other investors. As long as new investors contribute new cash and the majority of investors do not demand full repayment and believe in the non-existent assets they are alleged to own, a Ponzi scheme can retain the illusion of a successful business.
A Ponzi scheme was operated in Germany by Adele Spitzeder from 1869 to 1872, and in the United States by Sarah Howe through her “Ladies’ Deposit” in the 1880s. He offered an 8% interest rate to a mainly female audience, but then stole the money from the women who had deposited money with him. She was sentenced to three years in prison. Literature has dealt with Ponzi scams in the past and Little Dorrit by Frank O’Connor appears in 1857. A recent case of Ponzi Scam is seen in India Rs 60,000 cr Ponzi Scam: CBI arrests 11 of Pearls group, once a sponsor of Akali’s kabaddi events. But, there are still many such events happening. Charles Ponzi carried out this scheme in the 1920s and became well-known throughout the United States as a result of the large sums of money he received.
Ponzi Scheme “red flags” Why You Should Never Invest in Ponzi Scheme:
A lot of Ponzi scams have the same qualities. Keep an eye out for the following warning signs:
- With little or no risk, you can earn a lot of money. Every investment entails some level of risk, and higher-yielding investments often entail more risk. Any “guaranteed” investment opportunity should be viewed with caution.
- Returns are excessively constant. Investments fluctuate in value over time. Be wary of an investment that consistently produces positive returns regardless of market conditions.
- Unregistered investments are those that are not registered with the government. Ponzi schemes usually include investments that aren’t registered with the Securities and Exchange Commission (SEC) or state regulators. Investors will benefit from registration since it gives them access to information about the company’s management, products, services, and finances.
- Sellers who are not licenced. Investment professionals and firms must be licenced or registered under federal and state securities regulations. The majority of Ponzi schemes are run by unlicensed people or unregistered businesses.
- Strategies that are both secretive and sophisticated. If you don’t comprehend anything or can’t receive all the facts you need, don’t invest.
- There are issues with paperwork. Errors in account statements could indicate that funds are not being invested as promised.
- Payments are difficult to come by. If you don’t receive a payout or are having trouble cashing out, be sceptical. Promoters of Ponzi schemes sometimes try to deter players from cashing out by promising even bigger rewards if they continue in the game.
Breaking Down Ponzi Schemes
A Ponzi scheme is a sort of investment fraud in which investors are promised large returns in exchange for their money. Ponzi scheme participants concentrate all of their efforts on attracting new clients. The money is collected from new entrants and used to pay “returns” to the original investors.
A Ponzi scheme, on the other hand, is not the same as a pyramid scam. In a Ponzi scheme, investors are led to believe that their investments are yielding profits. Participants in a pyramid scheme, on the other hand, are well aware that the only way to earn is to recruit additional people into the scam. Ponzi schemes are mostly investment schemes.
How to Protect Yourself from Ponzi Schemes
An individual should investigate anyone who assists him in managing his funds in the same manner that an investor investigates a firm whose stock he is about to purchase. The simplest approach to do so is to contact the SEC and inquire if any open investigations are being conducted by their accountants (or investigating prior cases of fraud).
Also, before investing in any scheme, request a copy of the company’s financial documents to ensure that it is legitimate.
Source: The New Indian
Key Takeaways
A Ponzi scheme is nothing more than a sham investment. The Ponzi scheme, named after Charles Ponzi, a con artist in the 1920s, promises a steady stream of large profits with little risk. Although such a system may work in the near term, it will eventually run out of money. As a result, investors should be wary of assets that appear to be too good to be true.
