With the recent passing news of the biggest Ponzi scheme mastermind, Bernie Madoff, the threat of such fraud scheme has come into the light again. This scam is obviously not really a dull trick in the investment world. Especially with the possibly second-biggest scheme currently under investigation. Find out how to distinguish a legit investment offer and a Ponzi scheme below!
Ponzi scheme: understanding the basic
In a Ponzi scheme, the perpetrators offer clients deal that promises a large profit at a little to no risk. This, of course, is merely a lie to attract people to the deal offered. Companies that pull off this fraud scheme rely their longevity on new clients. Thus, attracting new clients to make investments is often the focus of these companies.
Why do these fraudulent companies always in constant need of new clients? Because they don’t generate profit from any kind of investment. They simply use the new income to pay for the original investor’s, or the earlier investor’s, returns. They would, however, claim the money as a profit from a legitimate transaction. Thus, without a flow of incoming new investors in the chain, the scheme will eventually fall apart.
At a glance, Ponzi schemes give off a similar resemblance to pyramid schemes. Both are using their new clients’ money to cover the earlier backer’s returns.
Avoiding frauds: notice the characteristics!
Investopedia noted several similar characteristics that Ponzi schemes have in general. Regardless of the technology involved in the strategy, you may still realize some of these points in most of them.
- Attracting people with an investment deal that results in unreasonable high returns with little to no risk guarantee,
- Delivering constant prevailing flow of returns despite a fluctuating market condition,
- The investments are not, or have not been, registered with the Securities and Exchange Commission (SEC),
- Keeping the investment strategies a secret, or claiming the investment strategies as too complex to explain,
- No transparency to the clients about the companies’ official paperwork for their investment,
- Companies tend to make it difficult for clients to remove their money.
While these characteristics may come off too general to distinguish a possible Ponzi scheme, it still is a helpful guide to avoid some fishy companies. Additionally, always try to consult a financial advisor before you sign a deal that involves a lot of money.
Read also: Mastermind Behind Giant Ponzi Scheme, Bernie Madoff, Passes
Follow and join us on Youtube, Instagram, Facebook, and Twitter to be part of the trader community in Asia
