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What is a Ponzi scheme?

You have probably heard the term “Ponzi scheme” thrown around a bit, especially in the media. It makes for an attractive headline that people are interested in, and they know that these types of investment schemes can cause people to lose a lot of money. But do you know how these schemes really work?

The steps in a Ponzi scheme

The general idea is that the scheme attracts investors with false promises, backs those promises up for as long as it can, and spreads in order to draw in as much money as possible. When the scheme falls apart, these investors lose their money.

Here are the typical steps involved in a Ponzi scheme:

  • The person or company running the scheme tells investors that they can take on little risk and reap massive rewards. This sounds great to investors who are tired of small gains for high levels of risk.
  • These gains are impossible, but the scheme creates the illusion of success by bringing on new investors and using their money to provide “returns” for investors who have been part of the system for longer. They see the returns they want and don’t know anything is wrong.
  • The scheme continues, with new investors becoming a necessity to pay off the older ones.
  • Eventually, when the scheme can’t find enough new investors to bring in the money for the fake returns, the bottom falls out and it’s clear that all of these new investors have lost their money. It was given to those at the top.

If something sounds too good to be true in investing, it usually is. That said, if you lost money on a scheme like this, you need to know what legal steps you can take. An experienced attorney can help you.