This one is more difficult to spot by people with limited financial knowledge.
The Ponzi scheme offers an attractive return on the initial investment.
Let's take the example of an investor giving 1 million to a crooked "financial adviser". The latter will promise a 10% return let's say every month.
Each month, the investor gets a check worth of 100,000 pesos. Seems good, no?
Well no. The truth is that the 100,000 check is coming from your own 1 million you gave him. It means that no money has been created to produce that interest.
After your 1 million has been fully spent, the scammer will have 3 options:
- Run away
- Tell you that the investment went really bad and can't pay your 1 million principal anymore
- Find an other victim to fund your monthly payment
If the latter solution is used by the scammer, he has to recruit more and more victims in order to pay for all the monthly payment.
At one time, it's obvious that the money will dry up if investors withdraw and will leave everyone pennyless.
The latest famous Ponzi scheme scammer is Bernard Madoff who scammed people for amounts of billions of dollars.
Beware of people selling you investments that are mathematically impossible to sustain. These are usually a scam. In doubt, please contact a financial advisor.
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