Ponzi schemes are a common type of investment fraud. The investors in these schemes are promised high rates of return, but the scheme only works if new investors keep investing money and pay off the earlier investor pool. In other words, the more money the top tier of investors get, the more money the bottom tier gets. While the new investor may get the rewards of the scheme, they might not get any of their initial investment back.

While the perpetrators of Ponzi schemes often promise investors high returns in a short amount of time, this is a common misconception. Legitimate investments always involve some risk and there is no guarantee that your money will grow at a certain rate. Even if the returns are very high, there is always risk involved. The best way to avoid Ponzi scams is to stick with legitimate investments. In today’s volatile economic climate, the risks are too great to ignore.

A Ponzi scheme operates in a similar way to a pyramid scheme. It begins with an operator paying high returns to lure early investors and convince them to invest more money. As new investors start investing, the schemer also pays their original investors back with the money from new investments and genuine profits. The resulting cascade effect can cause millions of dollars to be lost in an instant. However, there are ways to avoid falling prey to these scams.