While they’ve taken place in various guises over the last century, Ponzi schemes recently raged back to headlines thanks to Bernie Madoff, who is responsible for the largest case of financial fraud in American history. Whether you’re a regular investor or just someone who wants to understand more about what everyone means when they’re talking about these schemes, it’s easy to grasp the basic principle behind them and to understand just why they’re so detrimental. Many people have lost virtually all of their savings due to Ponzi schemes, and oftentimes entire fortunes vanish as a result of them. Here’s a bit of info on these fraudulent rackets.

Ponzi schemes take their name from Charles Ponzi, who ran a highly successful one in 1920. The scheme wasn’t invented by Ponzi, but he had more success with it than anyone before him and he quickly rose to infamy as a result. Basically, Ponzi schemes work by providing payments to investors from the money that they’ve already invested or from funds that new investors place into the scheme. Fake records and account statements are usually used to help cover up the total lack of profits, and whenever a payment is requested it will simply be taken from new funds.

Obviously, Ponzi schemes can’t sustain themselves forever. Madoff managed to perpetuate his particular scheme for quite some time, but eventually either phony securities will be noticed by enforcement agencies, investments slow to the point of rendering the scheme inoperable, or the perpetrator of the scheme simply vanishes. In many cases, investors will actually reinvest their money at the request of the perpetrator – a fact that helps maintain them for some time. Eventually, however, the steam will run out of the operation and it will come crashing to an end. There are a few things you can remember to help yourself avoid these schemes.

First of all, just be sure that you’re actually following your investments. Unregistered securities are a red flag for trouble. Also, be sure that you understand that higher than average returns being promised to you that sound too good to be true very well could be. Try to find investment brokers that you really trust and that your peers have faith in as well. And be sure that you diversify your investments, just in case you accidentally become part of Ponzi schemes. Judicious, carefully researched investment is the best prevention and the best protection for your money.

On March 13, 2012 By Richard Wilson

Practice Test

Ponzi Schemes – What are Ponzi Schemes?

Ever since the idea of investing money was created there have been dishonest people who are looking to make money off of the innocent trust of others. In the last decade or so, Ponzi schemes have made headlines all over the world for stealing money from unsuspecting investors. The most famous of all the Ponzi schemes is the one perpetrated by Bernie Madoff in 2008 that wound up costing investors over $65 billion from a list of clients that included famous actors and wealthy business people. The Madoff scandal is what brought this kind of crime to the attention of the general public, but dishonest investment companies have been stealing money from people for years in this manner.

Ponzi schemes first got their name from an investor name Charles Ponzi who used the age-old scheme in 1920 to steal millions of dollars from unsuspecting clients. Prior to Charles Ponzi, this kind of crime did not have a name even though records of it happening go all the way back to the mid-1800s. Ponzi schemes started to pick up speed in the 1980’s when cases of scandals all over the world were being reported. But, for some reason, these crimes were never very widely reported. People were losing hundreds of millions of dollars in these elaborate schemes and the world heard very little about it. The lack of attention in the media is one of the reasons these schemes were able to exist for so long. Once Madoff’s crimes made the news, people got smarter.

Ponzi schemes are investment frauds where the only income coming in to the scheme is the money being given up by the clients. The person or firm at the center of the scheme is not investing the clients’ money. Instead, the money is being used as a personal income to the criminals running the scheme. Ponzi schemes usually persist until someone gets suspicious and calls the authorities, or the fake securities being sold by the investment house cause government investors to be suspicious.

It is difficult for inexperienced investors to differentiate Ponzi schemes from legitimate investments. One sure way to determine Ponzi schemes if the rate of return on an investment seems to remain consistent for an unusually long period of time. Real investments gain and lose money on a regular basis, a scheme gives returns that do not vary much and are always gains. Most people are not clued in that it is a scam because they keep getting official looking statements. It is not until they try to get their money back that they learn the truth.

On March 12, 2012 By Richard Wilson

Practice Test

Ponzi Schemes- Avoid Getting Scammed

Ponzi schemes are a big concern in the investment world. There are a lot of different issues surrounding this type of scam, but the biggest thing is that people need to know what to look for so that they can avoid them at all cost. A Ponzi scheme, named for Charles Ponzi who first created the scheme back in the 1920s, is basically a fraud investment scam that involves people investing in nothing more than other people’s money. What happens in a Ponzi scheme is quite simple, but a lot of people don’t really understand how it works.

Ponzi schemes work on the basis of investing money. When investors give money to the person running the scheme, they earn a return. That return is paid from money that is invested by newcomers to the scheme. The organizations or people running these schemes convince people to invest in something for high returns and little risk, which is how people get involved in the first place. Once they invest their money, it is used to pay previous investors and fund the life of the fraudulent party, instead of actually being invested. Ultimately, the issue is that there is no legitimate investment going on in a Ponzi scheme.

The reason that Ponzi schemes are popular is because people are still falling for them. However, because there is never a tangible investment, these schemes all collapse eventually. When it becomes difficult to secure new investors or get existing investors to reinvest their funds, the scam collapses and leaves many people out of money and the fraudsters caught in their tracks. It’s best to always check out any investment opportunity and critical to remember that in a case like this, anything that sounds too good to be true usually is.

Whenever you’re going to make any type of investment, you have to make sure that you’re doing what you can to get the most for your money. No matter how much you have to spend or what types of investments you want to make, you should investigate everything to make sure that it’s legitimate before you start handing out money. Most importantly, if someone promises to make you rich beyond your wildest dreams with little to no risk, you should assume that they’re trying to scam you because the risk is always just as big as the reward in the world of investing. As long as you’re careful, you can avoid Ponzi schemes in your investments.

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