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Pyramid schemes: How not to fall for this type of investment scam

by , 24 August 2015

Unfortunately the investment world has its scam artists. The most common of these scams are Ponzi schemes and pyramid schemes.

So what exactly are pyramid schemes? What makes a pyramid scheme different from a Ponzi scheme? And how can you avoid investing in one?

Read on to find out…

What are pyramid schemes?

Pyramid schemes are a type of investment scam. They’re similar to Ponzi schemes.

Scammers dupe investors by enticing them to part with their cash with the lure of massive profits with little risk.

To invest in a pyramid scheme, you have to pay a fee. This fee means you can benefit from profit pay outs, Michelle Roberts of More Money Review explains.

But it’s not just a fee you have to pay, you also have to try to bring new investors into the scheme. This makes it different to Ponzi schemes, where the scammer is responsible for recruiting new investors.

This way of recruiting other investors can work well as people are more likely to trust a friend or family member who recommends an investment than a complete stranger.

If you’re one of the first investors into a pyramid scheme, you may see some returns as money from newer investors makes its way to the top of the pyramid. But it’s only the scammer who truly benefits from this scam.

Pyramid schemes tend to come to an end when new investors stop joining. The scheme then collapses and the scammer behind it disappears.

How to avoid investing in a pyramid scheme

As with Ponzi schemes, pyramid schemes lure investors with promises of large profits with little or no risk involved. If you come across such an investment proposition, you should be extremely wary.

All investments carry some form of risk. And generally speaking, the higher the potential profits, the higher the risks.

You should always check out any investment opportunity before giving your money away. This includes checking the investment is regulated. If it’s not, it’s not worth considering.

So there you have it. How not to fall for a pyramid scheme scam.

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Pyramid schemes: How not to fall for this type of investment scam
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