If you have your back against the financial wall, with overdue bills, threats of a layoff, or a house heading toward foreclosure, you may be tempted to look for business opportunities or investment opportunities that look like they can make you a lot of money in a short period of time. The good news is such opportunities exist, the bad news is that at best most of these opportunities won't make any money for you, and some of them are outright scams.
Participating in an honest and legal investment or business opportunity can be a very positive experience even if it doesn't make you any money. If your up front risk is low, and the amount of insight or education you get is high, pursuing these kinds of opportunities can be a positive thing for you. However, if the opportunity is a scam, you should stay away from it and not even consider it.
The most popular types of scams usually have one the following characteristics: they involve investments where you are promised huge, low risk returns on a financial investment, or it is a business opportunities where your profits depend on how many people you can convince to join the opportunity. The first is sometimes called a Ponzi scheme, and the second is a pyramid scheme.
What's a Ponzi Scheme
A Ponzi scheme is a financial investment where the profits for early investors are paid for by later investors. There is usually no real investment going on, and the people running the scam usually get paid by taking a commission or fee from each investor.
What's a Pyramid Scheme?
This is a business or other activity where most of your profits are based on getting others to join the scheme. While there may be a product or service involved in this business opportunity, the emphasis is on getting others to join, and often there is an up front cost to join the opportunity. The people running this kind of scheme may get paid from fees from other members, or from requiring members to spend significant amounts of money on inventory or other required costs.
What's the Difference Between a Ponzi Scheme and a Pyramid Scheme
Ponzi schemes usually only require your money to join, while Pyramid schemes often require both your money and your active participation to stay involved. It can be difficult to tell them apart, because sometimes they have characteristics of both kinds of schemes, and often elements of these schemes can be quite legitimate.
Another complication with Pyramid schemes is that there are legitimate business models that have many of the same characteristics. For example, multilevel or network marketing businesses are ways to sell goods or services through distributors. Typically, you act as a distributor of a product or service, and you’ll get commissions not only from the sales you make, but also from the sales of the people you recruit to become distributors. These recruits sometimes referred to as a downline.
Not all multilevel marketing plans are pyramid schemes. Those that are legitimate often emphasize training and development of the distributor, charge very low fees for entry, and put much more focus on delivering a product or a service to customers rather than on recruiting more distributors.
Joining something that you think is a pyramid scheme or Ponzi scheme is risky for two reasons. First, only the few high level people running these schemes tend to make any money, and second, they are illegal in most US states and in most parts of the world.
How Can You Tell if an Opportunity Is a Pyramid Scam or Ponzi Scheme?
There is no easy way to do this because most illegal schemes share many of the same elements as a legitimate business. Understanding any business or investment opportunity takes a bit of common sense, a basic understanding of how to run a business or make an investment, and at least a little bit of patience. If you do the following things, you will likely be able to spot either a bad legitimate opportunity or an obvious scam:
Look for unrealistic promises: There are no guaranteed profits in business or investing, so if anyone gives you this kind of guarantee, don't believe it. Also, if the people offering the opportunity brag about how much money you can make with little work or experience, don't believe it without some proof.
Ask questions: Don't be afraid to ask tough questions. If you don’t understand something, ask for more information until it is absolutely clear to you. The people running the business or who are involved in the business should be willing to answer your questions. If they are not, then back away from the opportunity.
Study the company’s track record: Look for newspaper or magazine articles about the company. Do an online search on the company, or its competitors to get a good idea of the information available about the company, including basic facts like who owns it and how long it has been in business.
Check out online opinions; Check out blogs, Twitter posts, and other information that can give you an idea what fans or even enemies think of the company.
Research the company's products or services: Find out what the company sells, or what type of investment it offers, to see if it makes sense to you. If the company is offering a common product at a much higher price than your local store, it probably is a bad idea to work with this company even if it is totally legitimate.
Look at the details of the deal: Ask your sponsor for the terms and conditions of the plan: the compensation structure, your potential expenses, support for claims about how much money you can make and the name and contact information of someone at the company who has details about the terms and conditions and can tell you how much the average distributor makes before and after expenses. Get this information in writing. Avoid any plan where the reward for recruiting new distributors is more than it is for selling products to the public. That’s a time tested tip-off to a pyramid scheme.
Find out your responsibilities: In most financial investments, all you risk is money. If you are joining an organization and actively recruiting others, then you should see what the company says in writing about your responsibilities. If you have to buy inventory or sell products or services, find out things like the company’s refund policy. Also, see if the company require you to buy training or marketing materials or pay for seminars. Find out how much time and money other distributors spent on training, marketing materials and seminars when they joined the plan, and whether the plan requires you to participate in periodic training. You should also find out what happens if you opt out of the training or are no longer active in the business?
Take your time: Don’t pay or sign any contracts the first time you run into an opportunity. Take your time to think over your decision. If you start to feel like you are dealing with used car salesmen eager to close the deal in the next five minutes, then you should probably look for opportunities elsewhere.
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