Ponzi scheme

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Related to Ponzi scheme: hedge fund, MMM, pyramid scheme, Bernie Madoff

Ponzi scheme

A fraudulent investment scheme. Investors are promised very high returns by the promoter. The original investors often realize these high returns because their payouts are funded by cash from new investors. New investors' cash is used to pay out the original investors. The investors' funds are usually not applied to the stated purpose. However, the reported high returns attract additional inflows of capital used to pay out subsequent investors. The scheme fails when the payouts to existing investors and/or redemption requests exceed new investor inflows.

Ponzi scheme

See pyramid.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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In a nutshell, a Ponzi scheme is a financial arrangement where the Ponzi operator, without a legitimate underlying business, makes payments to past investors with funds collected from new investors.