But who was Ponzi? Ponzi was this rotten Italian-American in the 20s who created a sophisticated benefits chain. And then the name Ponzi has lasted to posterity. The Ponzi scheme has become a "financial arrangement consisting in paying fraudulent benefits to clients mainly by funds contributed by new commers." Sooner or later, the deception comes to the surface and the castle collapses: the newcomers are those who pay the piper.
In 1920, Charles Ponzi was able to steal off thousands of people for the equivalent of $ 5 million of our days promising a 50% profit in 45 days.
What is the Ponzi scheme?It's very simple really.
The manager will promise a very high performance return for your investment. Something really exaggerated, "the bigger the lie, the easier it passes through."
Greedy customers trust their money in and get their first profits. From there on, word of mouth is usually enough to convince other people to put their money in. In the end, the last coming in to invest are the ones paying the interests of the others.
The idea is to go away with the money generated when the sum is important.
The system is based on the accumulation and the snowball effect (something that can be used wisely to pay your debts).
For example, imagine that I promised you a 20% fund benefits on a financial product and ask you to invest 100,000 euros.
At first, I've got three customers who agree to invest 100,000 euros each because of my reputation and the fact that the amount requested is not very important (relatively speaking ...).
With 300,000 euros, the payment of 20% of promised return is 60,000 euros the first year and I'm still keeping 240,000 in my pocket. Customers are happy and believe they have found the goose that lays the golden eggs. The news spread quickly and the second year and I have 20 customers and 2 million to manage.
At the end of the year, I have to pay the promised 20% of this amount: 400,000 euros. And I've got 1,600,000 in my pocket. And so on ...
Note that in the meantime I can put the money into a safe investment that could return from 4% to 5% to enjoy while I'm waiting.
Then time goes by and after 5 years, I find myself with 8,000,000 million euros that I've got after paying interests to people: it is time to move to a tax haven :)
I'm just going away with all.
The first customers gained back some of their money, those which came at the moment of scam a small part and the newcomers lost a lot.
Therefore it is called the "chain of Ponzi" because latecomers pay the interest of those who came first.
So these are some things to remember when investing:
- If it sounds too good to be true, then it is probably not true.
- There is no way to have astronomical interest returns (over 7%) without risk.
- To become quickly rich is not possible and should not be your goal.
- If you do not understand how the investment works do not invest.