A Ponzi scheme is an investment scheme aimed at giving returns to early investors in the opportunity that is derived from funds collected from subsequent investors. It often appears legitimate on the face but usually collapses as the ability to continue to obtain paying investors are beginning to fail. In a very few cases, the Ponzi scheme is made with a sincere effort to make a profit in the end.
This way, it tries to fulfill all obligations made to investors. At other times, the scheme is only meant to create wealth for the mastermind of the scheme with little or no attempt to actually generate any profit. The idea of a Ponzi scheme dates back to centuries. The present name of a fraudulent investment scheme of this kind is linked to an early 20th century Italian settler named Charles Ponzi.
After successfully moving to the United States, Ponzi launched an investment scheme or opportunity built around negotiation of reply vouchers. In a very short time, amounts could be collected from the latest members to pay back to the previous members or investors, plus helping to build a substantial amount of money for Ponzi personally. A Ponzi scheme is often considered to be a variant of a basic pyramid scheme.
However, there are some small differences between the two approaches. Both strategies are instances of a dishonest investment scheme. It makes use of inspiring technical jargon and promises of high and good returns in a short period of time. A Ponzi scheme has a main character or person that is the recipient of most of the benefit of the scheme. On the other hand, a pyramid involves building a network of investors.
These investors also function as active recruiters and who in one way or another deduct all their expenses from investments made as a result of their efforts. A true Ponzi scheme does not rely exclusively on new investors to keep working. As an attendant strategy, Ponzi's approach will also involve returning to former investors who have earned some form of return on their initial investments and convince them to reinvest.
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