Don’t know the difference of a Ponzi scheme vs a pyramid scheme? Lucky for you, this article will tell you everything you need to know!
Read on to learn it all…
LET’S DEFINE THEM
Before we can discuss the differences between Ponzi schemes and pyramid schemes, we have to understand what they both are.
With Ponzi schemes, investors give money to a portfolio manager. Then, when they want their money back, they are paid out with the incoming funds contributed by later investors. With a pyramid scheme, the initial schemer recruits other investors who in turn recruit other investors and so on.
First up, Ponzi schemes.
PONZI SCHEMES: DEFINED
Ponzi schemes, in short, are when a “Ponzi” (named after Charles Ponzi an Italian swindler and con artist in the U.S. and Canada) leader of the scheme takes and uses money from new investors to pay old investors.
Here are some common red flags for Ponzi schemes:
• You can’t have access to your money. This means that the person running the Ponzi scheme is often looking for new investors to give you money back.
• Your investments make too much money. If you’re always having a great return rate, there’s a chance it’s a Ponzi scheme. Investments won’t always pan out.
• There’s no risk. You can’t make money on an investment with no risk. If your broker uses the word “guarantee,” you should consider finding a different broker.
• It’s too complex. If your broker can’t explain what they’re doing with your money, that’s a really bad sign. Investing can be complicated, but a professional should be able to explain it to anyone.
In the early 20th century, Ponzi tricked thousands of people into investing their money in stamps.
At the beginning of his scheme, he actually bought stamps, but because he promised a 50 percent return rate, he wasn’t able to keep up. Instead, he started using money from other investors to pay others.
Ponzi wasn’t the first to do something like this, but his situation became so famous that it’s why we have the name today.
PYRAMID SCHEME: DEFINED
Pyramid schemes are often easier to spot because you practically know when you’re joining one. As someone in a pyramid scheme, you sell a product or the idea of a product to other people.
But you have to pay a certain amount of money to get the product or to join the pyramid scheme. This means that the only way you can make money is by getting others to join the pyramid scheme or by selling the product.
Pyramid schemes are technically not illegal because the investors have to know the situation up front. In fact, some investors can make money in the long term.
Here are some common red flags for pyramid schemes:
• You have to pay something before you can invest. Any money you put into a company should be invested. If there’s something like a “flat fee” before you can invest, get out.
• You have to sell something. An investment shouldn’t mean you have to spend money. That’s working for free!
• You make more money if friends sign up. This is an effective way to get more people in a pyramid scheme. If you make more money if people sign up, it’s a pyramid scheme.
SALES VS A PYRAMID SCHEME
Pyramid schemes sound quite similar to a regular sales job, but they are far from it.
A pyramid scheme will ask you to buy the products before you can sell them. A sales job will give you the products to sell. Keep in mind that many pyramid schemes will disguise themselves as businesses.
After looking at these two schemes, it’s easy to see why people can lose thousands in these schemes. It’s also easy to see why people need to be careful when choosing an investment.
But what’s the main difference?
The main difference between a Ponzi scheme and pyramid scheme is that the people in a pyramid scheme know they are in a pyramid scheme. In a Ponzi scheme, participants do not know.
That being said, you can still be tricked into a pyramid scheme if you’re not careful. Be sure to look out for the common red flags mentioned earlier.
PONZI SCHEME VS PYRAMID SCHEME
If you’re an investor, being able to identify a Ponzi scheme or a pyramid scheme is quite important. But knowing Ponzi scheme vs pyramid scheme will keep you even more on the know.
Now that you know the difference, you should be ready to tackle issues like this. Keep in mind that a Ponzi scheme and a pyramid scheme can both look very tempting. Don’t fall for it.