The Ponzi scheme works by promising seemingly unrealistic returns on investments. Since the con artist has no real experience or a track record for performing, people are naturally hesitant to risk their money despite an assurances that they could get rich if they did. Some will invariably take the chance however, either because they are too naive to understand the risks, or because they figure that it is worth a try. When the stipulated time has passed, these "investors" are often amazed to find that the claims were absolutely true. They really did make a large premium on their initial investment. That gives them confidence in the scheme, so these investors often put more money into it with the expectation of making even more of a profit. They will often tell their friends and family about their good fortune as well, generating important word of mouth for the scheme.

Ponzi schemes work not because those who operate them are such good investors, but because they are good con artists. They are not investing anything. Instead, they are taking money from newer investors to pay the promised returns to the older investors. Nothing of value is being produced, nor is there any actual trading of securities going on. So long as the scheme continues to attract new investors, however, it can continue. Ultimately, however, the scheme falls apart when its operator skips town with as much of the "investment money" as possible, when the operator fails to recruit enough new investors to make the payments to the old ones, or when the police are alerted and put a stop to it. When the scheme comes to a sudden halt, anyone with money in the scheme stands a good chance of losing it.

Ponzi schemes can and do make money for early investors, but it is difficult to tell in the early stages who is operating a Ponzi scheme and who is just trying to simply embezzle money. Anyone who leaves their money in the scheme, however, is doomed to lose it. Within six months, Ponzi had made himself a millionaire, but his investors eventually lost two-thirds of the money they had put into the system. To avoid sharing their fate, make sure you do your homework before making any investments. Make sure your broker is a regulated professional. The most important thing to remember is that if something seems too good to be true, it probably is.

 

Pyramid schemes ensnare potential investors by promising an exponential increase in profits. After all, if you recruited just two people to a pyramid program and they just recruited two and so on and so forth, you would soon have a large base of commissions. Of course, you may be able to recruit many more than just two people, so two people seems like a conservative estimate. This logic is false, however, because simple math will show that the people necessary to sustain a pyramid become exponentially more at ever level.

Although the first couple of groups may be able to make a profit off the scheme, those near the bottom will have to recruit many more people to recoup their initial investment. This becomes difficult, however, because at some point, the people needed to support a level in the pyramid are more than there are people in the country or in the world. Obviously, it does not matter what your product is, you cannot sell it to more people than there are in the world. Before you reach that point, you will probably reach a saturation point when no more people are interested in what the pyramid has to offer.

There are all types of pyramid schemes, many of which are illegal in Western countries. Pyramid schemes are similar to multilevel marketing, however, which is usually allowed since it is usually legitimate. You may want to research multilevel marketing companies before you invest your time and effort into them, however. Not all pyramid schemes are out to take your money, however. Some simply want to make you believe that you can make money with them.

Certain pay-to-use search engines, for example, have a pyramid based commission schedule. The search engine will pay you a small dividend for using their search engine, but will also pay you a little bit when people you refer use the search engine and when people they refer use it, etc. It is unlikely that you will ever see any real money, but the pyramid pay schedule makes it seem that you can make a good income just by promoting the search engine. Obviously, this is what its owners would like for you to think.