Ponzi schemes are ‘get rich quick’ investment scams which pay returns to investors from their own money, or from money paid in by subsequent investors. There is usually no actual investment scheme as those operating the schemes siphon off the money for themselves.
How do they work? Typically someone places an advertisement for a non-existent investment that offers extraordinary returns in a short space of time.
After receiving the promised returns on their investment, the first investors start to tell family and friends. Accordingly, the “scheme” gains credibility.
The money isn’t invested in any kind of investment vehicle, so there are no profits. Instead, the first investors are simply paid out from the money paid in by new investors.
Ponzi schemes are created for all levels of income, and have taken in investors in the top bracket as well as those on middle and low level incomes.
The schemes collapses when no new investors can be found or when earlier investors try to withdraw their principal investment. Most investors in a Ponzi scheme lose their money.
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