Ponzi Schemes and Tips to Avoid Them

"Ponzi scheme" is part of the American lexicon. Sometimes the phrase is misapplied to describe suboptimal financial transactions. Recurring monthly fees from oversubscribed health studios and 11-month advance deposits for summer camps may reflect sharp capitalism, but they are not Ponzi schemes. Ponzi schemes are investment scams. The scammer pays investors fictitious profits from the very money they paid the scheming enterprise. And the scammer returns existing investor money from new investor money. And so on until a pyramid of investors builds, with the bottom left holding the (empty) bag.

Any investor could fall for a Ponzi scheme. Finance professionals can fall for them when they do not do proper diligence (look no further than Bernie Madoff 's victims). Even legitimate enterprises sometimes convert to Ponzi schemes when operational profits cease. The only way to eliminate theoretical exposure to Ponzi schemes is to abstain from investing. But that is not realistic.

Read the full article here: Ponzi Schemes and Tips to Avoid Them | Anthony Fata.