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A high yield investment program is any investment that guarantees above
average return on investment. Some high yield programs are legitimate,
while others are ponzi schemes.
Ponzi Scheme Definition
A Ponzi scheme is a fraudulent investment operation that involves paying
returns to investors out of the money raised from subsequent investors,
rather than from profits generated by any real business. A Ponzi scheme
offers high short-term returns in order to entice new investors. The high
returns that Ponzi schemes advertise require an ever-increasing flow of
money from investors. Once the flow of new investment stops, the scheme
is doomed to collapse.
The scheme is named after Charles Ponzi, who invented the scam in the
early 1900's.
Today's schemes are often considerably more sophisticated than Ponzi's
(though the underlying formula is often quite similar), but the idea behind
every Ponzi scheme is to exploit the basic human trait of greed.
Example Of A Ponzi Scheme
An advertisement is placed promising extraordinary returns on an
investment – for example 20% for a 30 day contract. The precise mechanism
for this incredible return can be attributed to anything that sounds good but is
not specific: "global currency arbitrage", "futures trading", "high yield
investment programs", or similar.
With no proven track record for the in, only a few investors are tempted,
usually for smaller sums (say $5000). Sure enough, 30 days later, the
investor receives $6000 – the original capital plus the 20% return ($1000). At
this point, greed starts to overcome reason: the investor will put in more
money, and, as word begins to spread, other investors grab the "opportunity"
to participate. More and more people invest, and see their investments
return the promised large returns.
The reality of the scheme is that the "return" to the initial investors is being
paid out of the new, incoming investment money, not out of profits. There is
no "global currency arbitrage", "futures trading", or "high yield investment"
actually taking place. Instead, when Investor D puts in money, that money
becomes available to pay out "profits" to investors A, B, and C. When
investors X, Y, and Z put in money, that money is available to pay "profits" to
investors A through W.
One reason that the scheme works so well is that early investors – those
who actually got paid the large returns – quite commonly keep their money in
the scheme (it does, after all, pay out much better than any alternative
investment). Thus those running the scheme don't actually have to pay out
very much (net) – they simply have to send statements to investors that show
how much the investors have made by keeping the money in what looks like
a great place to earn a high return.
The catch is that at some point one of three things will happen: (a) the
promoters will vanish, taking all the investment money (less payouts) with
them; (b) the scheme will collapse of its own weight, as investment slows
and the promoters start having problems paying out the promised returns
(and when they start having problems, the word spreads); or (c) the scheme
is exposed, because much of the "assets" that are on the accounting
records of the so-called enterprise do not (cannot) really exist.
You can avoid ponzi schemes by doing your homework and applying
common sense. If something seems to god to be true, it often is. The
average yearly yield for an aggressive investment program is around six to
twelve percent. People have been trying to beat the market for ages and it
seems a lot of innocent people gut lured into the promises of easy riches for
little work.
