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Ponzi Scheme
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Ponzi schemes are
named after Carlo Ponzi who ran a huge Ponzi scheme in the US in the
1920s.
Ponzi schemes are named after Charles Ponzi, an Italian immigrant who
perpetrated a legendary scam. Ponzi schemes -- which pay
"investors" inflated returns out of their own or new money plowed in by
other suckers, until the whole thing collapses -- are all around us.
who lured thousands of investors in New England in the 1920's. A Ponzi
scheme is also known as a pyramid scheme. It does not decline and
fall; it is typically hugely successful until it collapses. A
Ponzi scheme is a fraudulent investment operation that pays returns to
separate investors from their own money or money paid by subsequent
investors, rather than from any actual profit earned. Ponzi schemes
only work when there's more money coming in than going out. It usually
offers returns that other investments cannot guarantee in order to
entice new investors, in the form of short-term returns that are either
abnormally high or unusually consistent.
The perpetuation of the returns that a Ponzi scheme advertises and pays
requires an ever-increasing flow of money from investors in order to
keep the scheme going. Usually, the scheme is interrupted by
legal authorities before it collapses because a Ponzi scheme is
suspected or because the promoter is selling unregistered
securities. Knowingly entering a Ponzi scheme, even at the last
round of the scheme, can be rational economically if government bails
out those participating in the Ponzi scheme.
The scheme usually collapses under its own weight as investment slows
and the promoter starts having problems paying out the promised returns
(the higher the returns, the greater the chance of the Ponzi scheme
collapsing). However, several characteristics distinguish these
schemes from Ponzi schemes:
In a Ponzi scheme, the schemer acts as a "hub" for the victims,
interacting with all of them directly.
A Ponzi scheme claims to rely on some esoteric investment approach
(insider connections, etc. By contrast, Ponzi schemes can survive
simply by persuading most existing participants to "reinvest" their
money, with a relatively small number of new participants.
Pyramid schemes solicit investors that go well beyond their ability to
remain viable. Pyramid Scheme Alert is the first consumer
organization to confront the abuses and trickery of pyramid scheme
perpetrators. A Ponzi scheme is a variation of illegal pyramid
sales schemes. In a pyramid sales plan, a person pays a fee to
become a distributor. These new distributors are beneath the
person who brought them into the pyramid scheme, so they are "under the
pyramid. " In illegal pyramid schemes, only the people at the top
of the pyramid make substantial money because they get a commission
from the products sold by everyone below them. As more people
become distributors, the persons lower in the pyramid have less chance
to make money.
Before you invest in any business, it is best to do your due
dilligence. Just ask your self this simple question, "is the business I
am about to invest in an illegal or legal entity?" If its too good to
be true then it usually is.
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