PONZI SCHEME Meaning and
Definition
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A Ponzi scheme is a fraudulent investment operation that involves the payment of supposed returns to existing investors from funds contributed by new investors. Named after Charles Ponzi, an Italian-born swindler who conducted the most infamous scheme in the early 20th century, a Ponzi scheme lures in unsuspecting individuals with promises of unusually high returns on their investments. The scheme operates by using the money from new investors to pay off earlier investors, creating the illusion of profits and success.
This type of fraudulent investment scheme typically relies on a constant flow of new investors, as opposed to generating legitimate profits through actual investment activities. As new funds are introduced, they are redirected to earlier investors in the form of "returns" or "dividends." This artificial appearance of high returns entices more individuals to invest, making the operation financially sustainable for a limited period.
The collapse of a Ponzi scheme is inevitable, as it becomes increasingly difficult to recruit new investors or when a large number of existing investors seek to withdraw their funds simultaneously. At this point, the operator is unable to meet payment obligations, revealing the fraudulent nature of the scheme. Consequently, investors lose the funds they invested, and the person behind the Ponzi scheme faces legal ramifications for orchestrating this type of financial fraud.
Overall, a Ponzi scheme is an unlawful scheme that relies on deception and recruiting new investors to maintain the illusion of profitability, and ultimately collapses when the cash inflow fails to match the outflow.
Common Misspellings for PONZI SCHEME
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Etymology of PONZI SCHEME
The term "Ponzi scheme" is derived from the name of an Italian-American businessman named Charles Ponzi, who perpetrated a famous fraudulent investment scheme in the early 20th century. Charles Ponzi promised investors high returns on international postal reply coupons, exploiting differences in currency exchange rates. However, he was actually using funds from new investors to pay returns to earlier investors, rather than generating legitimate profits. When the scheme collapsed, many investors lost their money, and Ponzi became synonymous with this type of fraudulent investment scheme. Hence, the term "Ponzi scheme" was coined to describe fraudulent schemes characterized by promising high returns to investors, which are paid with funds from subsequent investors rather than legitimate profits.
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