With Millennials and Gen Z investing their money more frequently and earlier than prior generations, investing has become more popular and accessible. However, this does not imply that there aren’t any risks. It can be simple to get carried away with the prospect of earning extra money, especially if you’re new to investing, and fall prey to shady investments like Ponzi and pyramid scams.
Ponzi and pyramid schemes are probably familiar to you, but do you really understand what they are or how to avoid investing in them? Research is the greatest method to make sure you’re investing wisely and securely. It’s a good idea to start by understanding the distinctions between Ponzi and pyramid scams and the warning signs to look out for.
A Ponzi Scheme: What Is It
A Ponzi scheme is a form of investment fraud where money from new investors is used to reimburse money from earlier investors. In order to draw in new investors, organizers frequently assert that their schemes can create great returns with little risk because they depend on a steady stream of cash. This also renders them prone to failure because Ponzi schemes typically fall apart once new investors stop pouring in (or when existing investors withdraw their money).
People’s investments in Ponzi schemes are neither safe nor put to the intended use. You might never see any rewards and lose your entire initial investment.
A Pyramid Scheme: What Is It
A Ponzi scheme and a pyramid scam both guarantee large returns on an initial investment. The major distinction between Ponzi and pyramid schemes, however, is that in the latter, in order to “advance up” the chain, investors must attract other investors—who in turn must recruit more investors.
This kind of operation often starts with the sale of items before launching into a vicious recruitment cycle. Pyramid schemes have the potential to have a significant negative impact on many people’s savings and investments.
Who is in danger
Ponzi and pyramid scams can have an impact on a wide range of people and communities. One of the biggest Ponzi scams in Pennsylvania history, involving the solicitation of $60 million from his Amish and Mennonite clients, resulted in the sentencing of a Berks County man to 10 years in jail in July 2020. Later on in the same year, a Pennsylvania lawyer from Nazareth received a term for his involvement in a $2.7 million fraud.
How to Safeguard Yourself
Despite the fact that Ponzi and pyramid schemes can take many different shapes, there are a few crucial signs to look out for. First and foremost, organizers frequently make unrealistic promises of large returns with little to no risk. Since risk and reward are inversely correlated, larger, less secure investments frequently yield higher profits. Investigate further if these kinds of claims are being made. Consistent returns should also be avoided because they are unusual.
You need to be on the lookout for a few warning signs in order to protect yourself from both Ponzi and pyramid schemes. You should look for an alternate investment if you have to recruit other investors, or make a sizable upfront expenditure to participate, or are promised to “become rich soon.”
The secret to staying clear of financial scams? Be knowledgeable, be aware of the warning flags, and watch where you invest your money.
A Better Method of Investing
Think about low-risk investing as an alternative to seeking high returns. Safer alternatives with guaranteed rates of return include money market accounts, high yield savings accounts, savings bonds, and certificates of deposit. Additionally, you don’t run the risk of losing your initial investment money when you make these kinds of investments.
