What is a Ponzi Scheme? Part 1 - Data Interrogation

A Ponzi Scheme is an illegal Pyramid Scheme in that funds are solicited from investors, often with the pretence of trading on the stock exchange, whereby fixed recurring returns are guaranteed.

These repayments are then paid to the investors out of the investments from previous investors and not from funds generated from genuine trading.

The classical illegal pyramid scheme guarantees repayments only upon the introduction of new recruits into the pyramid scheme, whereas the Ponzi scheme, which is often disguised as investment opportunities, guarantees fixed repayments irrespective of the investor's further involvement.

In both the illegal Pyramid Scheme where payment is made upon the introduction of new investors and the Ponzi Scheme where repayments are effected regardless of the investor introducing new investors, the system pays these investors out of former investments "Peter robs Paul".

As opposed to a glaringly obvious Pyramid Scheme a Ponzi Scheme is difficult to recognise as an illegal Pyramid, because the nature of a Ponzi is disguised as a legitimate investment opportunity.

Genuine trading on the stock market is by its very nature is risky and guaranteed fixed and lucrative recurring income from such a venture is unlikely without taking substantial risks.

A Ponzi Scheme is often disguised as an investment opportunity in a reputable trading initiative and the practise of making repayments from capital as opposed to profit is not disclosed.

In reality any trading venture is coupled with inherent risks, however in the case of a Ponzi Scheme disguised as a trading venture, fixed repayments are guaranteed without any risk, despite the possibility of fluctuations in the market or bad trading months. The reason for this is that in the case of a Ponzi Scheme, returns are paid from other investor money and not from any real trading done.

Multi Level Marketing is similar in structure to a pyramid scheme and is not to be confused with an illegal pyramid scheme. In an MLM profits are generated and proportionately distributed to an upline or arguably a product of value is procured, which shifts the incentive of the scheme to simply make money, as is the case with the illegal pyramid scheme, where investor funds are merely redistributed with no valuable product and no profits are generated.

The principals of a Ponzi Scheme will often dispay exorbitant wealth and success as a mechanism of advertising the venture and many investors will be lured by the testimony of previous investors who were paid from the system.

The MLM and Pyramid Schemes patterns clearly involve the introduction of new members or agents to be brought into the system in order for an investor to be paid. In the case of a Ponzi Scheme the investor may not be aware that the system is dependent on new recruits in order to get money out.

As is the case with any pyramid scheme whereby the success of the investor is determined by the introduction of new people into the scam, the system will collapse and investments will be lost the the investor.

Ponzi Schemes are often to the detriment of people who in good faith have invested money that they simply cant afford to lose. This is despite the fact that the investment opportunity is explained as being without risk and recurring income is guaranteed.

Investors caught up in Ponzi Schemes are often attracted by the apparent success of other investors who were in turn pulled in by the allure of risk free returns that simply sound too good to be true. These investors are not financially savvy and areoften pensioners or people who can not afford to lose the money that they invested.