Many times, a scam can seem legitimate because it has some aspects that are quite believable. Ponzi schemes are one such scam that can easily trick people into thinking it is something real and has the potential to be lucrative. 

The FBI explains that the promises of riches someone makes as part of trying to rope people into a Ponzi scheme can work quite well. They do a good job of explaining the investment as being easy and quick to turn a buck. At the same time, they do an equally good job of covering up the downsides to the scheme. 

The plan

A Ponzi scheme involves seeking out investors to make investments with promises of fast returns. The scammers will take the investments from new investors and pay the old investors. Without a consistent stream of new investors, the money runs out because the scammers never invest any of the money. They end up keeping the majority of the investments and payout only small dividends to some of the first investors in the scheme. 

Red flags

It is not always easy to identify a Ponzi scheme because people will typically not realize what is happening until too late. However, the U.S. Securities and Exchange Commission explains there are some signs to watch for that are good indicators that an investment situation may be a scam. 

Always check the background of any running an investment program or working for a program. Make sure they have proper licensing and that there is SEC registration for the investments. 

Watch for trouble getting payment. Investors should have no issues receiving payment or cashing out whenever they want in a legitimate program. 

Promises of high returns and no risk are almost always a good signal that something is wrong. Real investing always has risk, and there is never a guarantee of any return. 

Investors should be able to get complete explanations of how the investment works and the strategies used in investing. If things are secret, there are no straight answers or the answers are confusing without an explanation, then investors should walk away.