Ponzi Scheme

Loading the player...

What is a 'Ponzi Scheme'

A Ponzi scheme is 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.

BREAKING DOWN 'Ponzi Scheme'

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.

RELATED TERMS
  1. Ponzi Mania

    The seemingly sudden recognition of Ponzi schemes following the ...
  2. High-Yield Investment Program - ...

    A fraudulent investment scheme that purports to deliver extraordinarily ...
  3. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, ...
  5. Affinity Fraud

    A type of investment scam in which a con artist targets members ...
  6. Mini Madoff

    Financial con men that are accused of or have commited crimes ...
Related Articles
  1. Investing

    What Is A Ponzi Scheme?

    Protect yourself from scams by learning the structure behind this fraudulent investing scheme.
  2. Financial Advisor

    6 Ways to Avoid an Investment Ponzi Scheme

    Investments that promise high returns with little risk are everyone's dream – but if they could also be a Ponzi scheme. Here's how to protect yourself.
  3. Financial Advisor

    How to Avoid the Top Financial Advisor Scams

    Investors need to be wary of financial advisor scams. Here are the most common and how you can protected yourself.
  4. Financial Advisor

    The 5 Worst Financial Advisor Scammers of All Time

    A look back at history's five worst financial scams.
  5. Markets

    What Is A Pyramid Scheme?

    Find out how this financial scam works and why you should watch out.
  6. Entrepreneurship & Small Business

    Multi-Level Marketing

    Learn how to differentiate between a legitimate marketing strategy and a pyramid scheme.
  7. Financial Advisor

    Are You Sure You Aren't Ponzi Scheme-Susceptible?

    Anyone can be a victim of a Ponzi scheme — even the most financially literate. Here's how to avoid the next Madoff.
  8. ETFs & Mutual Funds

    Mutual Funds Vs ETFs

    Learn more on how these collective investment schemes are similiar in design but differ in a few key areas that affect an investor's returns.
  9. Markets

    Recognize And Avoid "Work At Home" Scams

    From pyramid schemes to envelope stuffing, there are a lot of scams masquerading as legitimate part-time work.
  10. Financial Advisor

    9 Signs That Business ‘Opportunity’ May Be a Scam

    There can be a fine line between a legitimate multi-level marketing opportunity and a pyramid scheme. Here are 9 warning signs.
RELATED FAQS
  1. What is the difference between a Ponzi and a pyramid scheme?

    Pyramid schemes and Ponzi schemes share many similar characteristics in which unsuspecting individuals are fooled by unscrupulous ... Read Answer >>
  2. What are some famous scandals that demonstrate the agency problem?

    Learn more about the agency problem and find a few famous examples. Find out what contributes to these problems and how investors ... Read Answer >>
  3. Why was the accountant responsible for auditing ZZZZ Best unable to determine that ...

    Find out why the accountant responsible for auditing ZZZZ Best couldn't determine that the company was engaged in a Ponzi ... Read Answer >>
  4. What kinds of acts pertaining to interests in collective investment schemes are excluded ...

    Learn about some of the kinds of acts related to collective investment schemes that are excluded from regulation as financial ... Read Answer >>
  5. How does a pump and dump scam work?

    A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once ... Read Answer >>
  6. What is a risk pyramid and why is it important?

    Learn about the risk pyramid and what it is used for; discover why it is important for investors to use the risk pyramid ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center