How do Ponzi Schemes work?
I'd like to think I am a smart person, but when it comes to finances I am clueless! And in the midst of this whole Madoff fiasco, I'd like to remain well informed, so I was hoping someone could answer three questions for me:
First off, how do people make money on Ponzi schemes if all they are doing is luring in new investors to pay off old ones?
Second, how can someone successfully cover up $50 billion fraud like Madoff did? That seems impossible to get away with...
And third, how is a Ponzi scheme different than a Pyramid scheme?
Just trying to get the facts straight here. Thanks in advance for anyone who is willing to explain this to me!
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In a Ponzi scheme there really is not much money being made. The scheme works by luring new investors and using the money that they invest to pay others. The only way the scheme continues is by luring new people and convincing the people who are already investing to stay in and invest more promising unreal returns. A pyramid scheme is one where a person markets a product or idea or whatever else and tries to get people to buy into it. Then once someone buys into it they train them to promote the product/idea to others as well. The person at the top makes money from all the people who they recruit down the line. Go to this link and read up about Ponzi schemes, its origins and the difference between Ponzi schemes and other marketing tactics.
http://en.wikipedia.org/wiki/Ponzi_scheme
Ponzi= Pyramid
If you know how a Pyramid scheme works then you know the answer to your first question.
Answer to question 2: The bolder & more daring the crime, the less likely people will believe that it can be done.
It's only until new money comes in when new money stops to comes in that means its over people's gonna find out sooner or later.
http://economics.about.com/od/financialmarkets/f/p...