What is a Ponzi Scheme in Simple Terms

Ponzi schemes, also known as pyramid schemes, are named after the 20th century fraudster: Charles Ponzi. What is a Ponzi scheme? A Ponzi scheme is a financial scheme in which the fraudster uses the capital investment from new investors to pay returns to older investors. Why do people fall for these schemes? In my opinion the reason people fall for these schemes is a combination of greed, by the investors and showmanship, by the fraudsters. The fraudsters will routinely promise returns above that which the market would normally allow for the type of investments, which they claim to be making. This lures naturally greedy investors into the scheme. The showmanship side of things frequently uses the mystique of labeling the scheme as an exclusive deal. The scheme is usually marketed only by word of mouth, they count on the investors in the scheme to tell people about their great returns and rope in more investors. The fraudsters running the Ponzi scheme might even turn away some investors to propagate that impression. Investors are always looking for exclusive insider deals that can make them more money, than conventional investments and the fraudsters exploit this.
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Why are there so many Ponzi schemes at the moment?

It seems like there is currently a flood of Ponzi schemes being reported, all over the world, in some cases involving billions of dollars. The truth is that Ponzi schemes frequently only come to light when the fraudsters can’t get new investors to fund the scheme anymore. With the current recession people have started asking questions about the safety of their investments and moved lots of money into recession proof investments. This left Ponzi schemes bankrupt and unable to pay back their investors.

Markets don't always go up

Do you have any money in a Ponzi scheme?

The answer might come as a surprise to you. Many people go to an investment advisor. The advisor is then suppose to invest your money in line with your risk/reward preferences. Many advisors have however placed all of their clients money into a single investment, not knowing that it is in fact a Ponzi scheme. The advisor would be protected by the contract they had their clients sign before taking their money. It leaves the investment adviser free to spend their time looking for more investors, instead of administrating the investments. This is of course completely unethical, but perfectly legal. Several investors have been completely wiped out like this recently.

The only way to protect yourself from this is to know exactly where your money is invested. Simply do not accept claims that it is a trade secret as an answer.

The victims always say the same thing

Biggest Ponzi scheme so far:

A $50 billion Ponzi scheme masterminded by former Nasdaq chairman Bernard Madoff is the biggest scheme so far. Madoff had been reported to the FCC and investigated so far back as 2001, but they found nothing wrong with his practices.

These scheme have expanded in size as well as number over the last 30 years.

Investor beware.


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