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Ponzi Schemes

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Ponzi Scheme Definition Glossary of Investment Terms - Ponzi Scheme

Ponzi Scheme : Ponzi scheme is the name of a fraudulent operation designed to take money from new "investors" and give it to previous "investors" instead of using it to create an actual profit. Ponzi schemes are usually cloaked by seemingly legitimate investment operations with high returns for those who buy into the program. These high short-term returns are usually used to lure new investors into the program and thereby creating a greater flow of money to pay out to subsequent investors. In a Ponzi scheme the earnings are less than the profits, meaning the program will inevitably collapse after a period of time.
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Ponzi schemes can sometimes last a long time since the system does not depend entirely on new investors. Instead, individuals are usually encouraged to reinvest their money. By keeping the investments down to a relatively small group of people, Ponzi schemes can develop for many years before being detected. But, since these schemes require a continuous flow of new people and new money, they are eventually detected by either investors or authorities.

Ponzi schemes are named after Charles Ponzi who emigrated to the US from Italy in 1903. At the time the Post Office was using international reply coupons for intercontinental mail. Ponzi quickly learned to manipulate the coupon system for a small profit and began touting it as an investment opportunity to others. He realized the potential for massive personal profits and began promising huge returns. Although he still managed a few reply coupons, Ponzi learned that he could pay out high returns to both himself and his return investors with the money from new investors. Ponzi made millions but raised suspicion with his quick returns on investment. After some investigation, the government found that he was not making any real profits and the system collapsed.

Also called : Ponzis, Investment Swindle, Investment Scam, or Pyramid Schemes.

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