The Ponzi Scheme. Most people have heard this term thrown around in reference to a company with shady business practices, but do you know what a Ponzi Scheme is, or the origins of this business practice?
Origins of the Ponzi Scheme
Although the scheme was alluded to in some early works of literature, including a few titles by Charles Dickens, the literary term “Ponzi Scheme” was not coined until the 1920s, when businessman Charles Ponzi actually put into practice this unethical business style. During this time, Ponzi had the great idea to take advantage of the price difference of international reply coupons in various markets and planned to make a significant profit from the resale.
While his business endeavors may have started with good intentions, Ponzi wasn’t seeing the return he’d promised investors and began diverting the money paid to him by new investors to pay earlier investors in addition to himself. So essentially, his business was being sustained completely by the money of new investors, meaning the only way to maintain it was to continue making promises and bringing on new investors. Within a year of its inception, Ponzi’s business crumbled, ultimately costing investors around $20 million.
How to Spot a Ponzi Scheme
These days, there are two main types of businesses that are often lumped together with the Ponzi Scheme: the pyramid scheme and the economic bubble. Each of these types of businesses is characterized by its shady and unethical business practices, making the mention of these terms in reference to any company quite detrimental to their business. Much like rumors of the “ACN scam” that circle about in an attempt to destroy the company’s reputation.
A tell-tale sign of a Ponzi Scheme is the promise of a high return on investment, one that oftentimes sounds too good to be true, but for some, is often too good to pass up. Unlike the pyramid scheme, facilitators of the Ponzi Scheme are typically in direct contact with each investor, acting as somewhat of a hub for investors and investments, rather than delegating this work to others. Given these two factors, Ponzi Schemes have the ability to sustain significantly longer than other types of scams and schemes, since finding new investors is often relatively easy, and that’s all it takes to keep the scheme going.
Do Your Research
Prior to doing business with any company, do some research and make sure you understand the pros and cons of doing business with them. It’s wise to be mindful of a business opportunity that sounds too good to be true, but also a good idea to do your own study into the company to form your own opinion.