People tend to become enthusiastic about something- such as a business or a cause- and will do anything to help that thing succeed. This is called Seasoned Advocacy, and it's a natural human impulse. A Ponzi scheme takes advantage of people who are willing to give anything to help a business or a cause succeed. Ponzi schemes are named after Charles Ponzi, the Italian businessman who pioneered the practice in 1920. He used the new immigration laws in the United States to run a classic example of a ponzi scheme. Essentially, the term 'ponzi' comes from 'Poncy Neapolitan' and means 'upscale.'
The original concept of a ponzi scheme is quite simple: you start out by hooking a few high-end investors. You then use those high-end investors to lure even higher-end investors into your scheme. Everyone gets caught up in the scheme eventually. You keep rolling out new investors and old investors until you have enough money to pay off your initial investors. At that point, you've made enough money to pay off your initial investors, so you can start reinvesting profits into bringing in more investors. Everyone wins!
Unfortunately, the dream never lasts because government authorities inevitably catch wind of your scheme and shut it down. Every single one of the people involved in the original investment is now cash rich and ready to pay off his or her initial investment. However, there are no more high-end investments left for him to pry from unsuspecting new investors. This is called feeding the beast; once authorities shut down one of these schemes, more people tried their hand at running one. Certain government agencies banned specific ponzi schemes so that only desperate people would be willing to participate in them- but desperate people will always be willing to participate in something for money.
Ponzi schemes are usually quite clever and hard to detect initially. However, they're not infallible and there are some telltale signs that should clue you in to what's happening. If you're running short on money and realize you can't pay your bills, your friends or family and ask them for money, but they refuse to loan it to you- that may be because someone has been bilking them out of their money through a ponzi scheme. Also, if you're constantly traveling or buying expensive items with cash these may be signs that someone is laundering your profits through real estate speculation or questionable business deals overseas.
A ponzi scheme is an investment fraud where new participants are used to pay off earlier investors before new participants will invest in the scheme. Essentially, everyone gets scammed eventually when they get caught up in these schemes. There are many variations on ponzi schemes that have led many people off track in their financial lives; this includes cyclical gambling schemes like slot machines and gaming consoles as well as direct sales schemes like MLMs (multi-level marketing). It's important to avoid being scammed by any investment fraud; if something sounds too good to be true, it probably is!
