Aside from the typical business scams we find today, there are also investment scams that one should be aware of. It is important that one can recognize when they may be taken advantage of by someone who claims they are seeking investments for a business, as this is not always the case. Below is the definition of the Ponzi scheme and how to recognize it and best protect yourself and your money.

Definition:

A Ponzi scheme is an illegitimate investment scam that involves paying investors back from their own pocket, or money that is brought in from future investors instead of money brought in from business revenue. In the 1920′s a man by the name of Charles Ponzi was very well known for using the technique successfully and the scam was named after him although he was not the original creator of it.

Charles Ponzi would pay his investors 50% interest on their original investment and use the remainder for his own personal gains and pleasures. Eventually it became illegal as it is not recognized as a legit business because it works on the “rob-Peter-to-pay-Paul” principle.

How To Spot The Ponzi Scheme And Avoid It:

1. Those utilizing the Ponzi scheme will normally ask for a large sum of cash up front and work to convince you that the return will be given in a relatively short period of time.

2. Never get caught up in the rewards and always think about the risk. If the person working to invest your money is telling you there is no risk, this is not true! High dollar investments always come with the risk of losing your money, don’t be mistaken. If it was really that easy everyone would be doing it.

3. Be aware if the offer seems “Hyped” and to good to be true. Make sure the person looking to invest your money can provide you with the information as to what the business is and how it operates.

4. Ask if your investment money is returned from revenue, or other investors. If your return comes back from other investors then it surely is a “rob-Peter-to-pay-Paul” principle and is illegal!

5. In order for your return to be from revenue there must be some kind of product, or service the business offers. You must ask were the business revenue comes from and verify the product, or services are legit and in place.

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