ponzi scheme

Ponzi Scheme is a form of financial fraud in which older investors are paid with the contributions of new investors, rather than from actual profits from investments. The name comes from Charles Ponzi, who became known for this type of financial fraud in the 1920s.

How Does a Ponzi Scheme Work?

The person running a Ponzi Scheme promises investors very high returns on their investments in a short period. In reality, however, the money from new investors is used to pay profits to older investors. This way, the fraud can continue for a certain time until eventually there are not enough funds for payouts, and the whole scheme collapses.

How to Recognize a Ponzi Scheme?

There are several factors that can help identify a Ponzi Scheme. Here are a few warning signs:

• Promises of very high returns on investments in a short time.
• Lack of a clear explanation of how the company exactly generates profits.
• A system mainly based on attracting new investors rather than generating actual revenues.
• Pressure to make quick investment decisions and negative reactions to critical questions.

Consequences of a Ponzi Scheme

Individuals involved in a Ponzi Scheme often lose their savings because, by the time the scheme is exposed and fails, the invested funds are already lost. Additionally, such frauds can negatively impact trust in financial markets and cause losses for honest investors.

The discovery of a Ponzi Scheme usually results from investigations conducted by regulatory authorities or other supervisory entities. Therefore, it is important for investors to be aware of the risks associated with these types of frauds and to conduct thorough analyses before making investment decisions.