Imagine waking up one morning to find that an investment company you're dealing with is nothing more than a Ponzi scheme. Just like that, your money is gone; now all you have to look forward to is trying to rebuild the swindled investment. How is this possible? Keep reading.

A Ponzi scheme is an illegal investment scam. Legitimate investments are founded on the premise of returns that are tied to something tangible (such as company profits). A Ponzi scheme only goes as far as the people pumping money into it.

The scheme starts by offering the original investors massive returns that are unachievable by legal means. As more people are charmed by unrealistic expectations, the first wave of investors receives their promised returns directly from the money of later investors.

Ponzi schemes are attractive to market amateurs and seasoned investors alike, promising high returns from some type of unconventional investment approach. A claim that the schemer has ties to inside information is a popular way to explain unrealistic returns. All the while,money is being skimmed from the investments by the schemer. If investors stop buying in or too many try to redeem their investments, the whole thing collapses.

While the first known Ponzi scheme was constructed by William Miller in the late 1800s, its namesake was Charles Ponzi, who started his scam in Boston in 1919. Ponzi attracted willing investors by promising 50% returns within 45 days. The first group of investors got their promised returns--the latter ones did not. When investors asked Ponzi for their money back, he couldn't pay it out because he wasn't taking enough new money in. Thus, his scheme collapsed. He was eventually charged with 86 counts of fraud and went to prison.

If initial investors are getting returns, they might believe that the investment is legitimate and dump more money into it. They may also give friends or acquaintances the "hot tip" and provide the Ponzi scheme with fresh blood: more money to continue fueling the phantom investment. The more people that are duped, the more the scheme looks like there's nothing wrong with it. But it's not just in hindsight that you can see problems.

Some Ponzi schemes advertise themselves as certificates of deposit or other legitimate investments, so people will be duped into investing. The best advice is to research any company before investing. Keep an eye out for these warning signs:

• The yield on investments is high, even if the economy and stock market are plummeting.
• The company boasts a great investing plan, but details and certification are lacking or "kept confidential."
• The investment firm's auditor (who certifies financial statements) is hard to track down or from an unknown or little-known auditing firm.

If you suspect you've already invested in a Ponzi scheme, contact the Securities Exchange Commission. Given enough evidence, the SEC will audit the investment you believe to be fraudulent. If it turns out to be a scam, the federal government can seize the company's assets. The matter can then go to court, and--depending on the circumstances--investors may or may not get their money back.

Sources: pittsburghlive.comfbi.gov, nasaa.org, nytimes.com, huffingtonpost.com, state.ny.us, ftc.gov, wsj.net, time.com, sec.gov, sipc.org, businessweek.com