Ponzi Scheme

A A A

DEFINITION

A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.



INVESTOPEDIA EXPLAINS

The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.

A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.

For both schemes, however, eventually there isn't enough money to go around and the schemes unravel.


VIDEO

RELATED TERMS
  1. High-Yield Investment Program - ...

    A fraudulent investment scheme that purports to deliver extraordinarily high ...
  2. Straw Buying

    When an individual makes a purchase on behalf of someone who otherwise would ...
  3. Mini Madoff

    Financial con men that are accused of or have commited crimes similar to those ...
  4. Ponzi Mania

    The seemingly sudden recognition of Ponzi schemes following the arrest of Bernard ...
  5. Affinity Fraud

    A type of investment scam in which a con artist targets members of an identifiable ...
  6. Cowboy Marketing

    A slang term to describe a situation in which a company is unaware that a marketer ...
  7. Bernard Madoff

    The former chairman of the Nasdaq and founder of the market-making firm Bernard ...
  8. Caveat Emptor

    A Latin phrase for "let the buyer beware." The term is primarily used in real ...
  9. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make ...
  10. Bre-X Minerals Ltd.

    One of the biggest mining scams and frauds perpetrated by any company in Canada. ...
Related Articles
  1. The Biggest Stock Scams Of All Time
    Investing

    The Biggest Stock Scams Of All Time

  2. What Is A Pyramid Scheme?
    Active Trading

    What Is A Pyramid Scheme?

  3. What Is A Ponzi Scheme?
    Investing

    What Is A Ponzi Scheme?

  4. The Ghouls And Monsters On Wall Street
    Retirement

    The Ghouls And Monsters On Wall Street

  5. What is the difference between a Ponzi ...
    Investing

    What is the difference between a Ponzi ...

  6. How To Avoid Falling Prey To The Next ...
    Brokers

    How To Avoid Falling Prey To The Next ...

  7. How The Sarbanes-Oxley Era Affected ...
    Fundamental Analysis

    How The Sarbanes-Oxley Era Affected ...

  8. What are the dangers of using the Electronic ...
    Taxes

    What are the dangers of using the Electronic ...

  9. Invest Like Madoff - Without The Jail ...
    Options & Futures

    Invest Like Madoff - Without The Jail ...

  10. Will Bitcoin And Walmart Force Western ...
    Investing News

    Will Bitcoin And Walmart Force Western ...

comments powered by Disqus
Hot Definitions
  1. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  2. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  3. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  4. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  5. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  6. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
Trading Center