Ponzi Scheme Explained through a Simple Example

Imagine getting return not from profits…

But from the money brought in by the next investor.

This is what is called a Ponzi Scheme. Here, high returns are promised but are delivered not from a legitimate source like business profits or investment profits but instead from money invested by new investor to pay early investors in the scheme.

For example, let’s say a person approaches you invest in a scheme which promises a guaranteed return of suppose 30% on your initial investments. That person says that he has already invested Rs.100 in this scheme and is receiving the stated return. Seeing this, you also invest Rs.100 in the scheme. After a year, you do not get any return and upon investigating you realize that Rs.100 that you invested was used to give Rs.30 each to 3 early investors who already invested Rs.100 before you. And now no new investor was added to the scheme hence system collapsed and you lost your investment.

Such scheme is called a Ponzi Scheme.

These schemes are easy to identify because of following characteristics like promising high returns with little or no risk, complex strategies, overly consistent returns, problems with paperwork, unlicensed sellers and more reliance on oral trust rather than paperwork.

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