One of the simplest, yet most effective scams perpetrated on unsuspecting investors for many years have been Ponzi schemes.

In these schemes the promoter promises investors a very high return on their investment and says it is secure.

Part of the money deposited by early investors is then used to pay their first dividend cheques or interest. The victims are more than happy to get high dividends. These schemes only require a few people in their early stages to be successful. The swindler continues paying them dividends for a couple of months until they are more comfortable with their investments, and decide to invest more.

They then begin to urge their friends and relatives to invest as well. Soon, there is a steady flow of funds into the scheme, and the number of investors grows.

If the swindler is disciplined about how much money is left in the account to pay "dividends", the scam can go on for many years. Theoretically, if the scheme continues to draw in new investors, it could go on indefinitely. In practice such schemes usually fall over because the promoter starts to spend the money too quickly, or the pool of investors starts to dry up.

Stories about Ponzi schemes

• Read how Ponzi schemes operate:
  10% (120% per year) - where do you get it?
• The trust account that was anything but...
• Investing on the advice of friends: a warning
• The Wattle Group investment scheme had around 2,700 investors across Australia and raised over $160 million. Investors were told their funds were on-loaned on a short-term basis to provide a return of up to 50 per cent. Instead, it was a 'Ponzi-type' scheme. Read what happened to the people who organised this scam