Named after Charles Ponzi, who infamously bilked investors out of millions of dollars in the 1920s, the Ponzi Scheme is an investment scam that involves the payment of abnormally high "returns" to investors that are actually paid from money paid in by other investors. While it's possible that a Ponzi Scheme may involve some real investment, the distinction between a legitimate investment and a Ponzi Scheme is that some of the returns are not from legitimate investments but are merely a transfer of money from new investors to earlier investors.
Much like a pyramid scheme, this type of investment scheme depends on the recruitment of a sufficient number of new investors to pay high returns to older investors. At some point the stream of new recruits stops growing and this then leads to the collapse of the scheme.
While some Ponzi Schemes may be sufficiently sophisticated that even the most cautious investors may be duped, there are some factors one can look for that are common to many Ponzi Schemes: nonliquidity, promises of high returns, and unclear investments.
Liquidity refers to how easy it is to remove cash from an account. A checking account, for example, is highly liquid you can demand that the bank pay you at any time. Especially as the Ponzi Scheme grows larger and it becomes harder to recruit a sufficient number of new investors to pay in money for transferring to earlier investors, the operator of the scheme may impose rules for how long one must wait to remove money from an account. As it becomes harder to get new cash, the operators of these scams may increase the time a victim must wait before they are allowed to remove their money.
Unclear investments. Another red flag for any investment is limited information regarding the underlying investment.
Promises of high returns are a red flag for any investment. While guaranteed high returns may be alluring, they're too good to be true.