A pyramid scheme is a special scheme designed to profit its members. An important factor is that the funds come from the new participants in the financial scheme. To put it in simple words, the income pyramid schemes bring those who joined today and contributed, which is transmitted in the form of earnings of those who entered into it yesterday or a week ago.
The Internet is filled with a huge number of articles about what a pyramid scheme is a well thought out system to withdraw funds from investors, however, this is not entirely true. As any company that uses traditional methods of business management can be called a pyramid scheme, this management will need to make a mistake in business profitability. In this case, the business will cease to be profitable, which will lead to impossibility of debt repayment that will lead to new loans. When the payoff amount would still exceed the amount of funds the business will go bankrupt and Ponzi scheme will be broken.
In the economic sector there are two types of pyramid schemes:
- MLM (eng. MLM, multilevel marketing) multi – level pyramid;
- the pyramid, built according to the scheme of Charles Ponzi.
For a General understanding, describe the main characteristics of the pyramids:
- an aggressive advertising campaign;
- the opacity of schemes for profit;
- lack of assets and own funds;
- the promise of higher yields (above 20%);
- the lack of explicit economic transactions;
- guaranteeing returns on the securities;
- the vague wording of the company's activities;
- the opacity of the financial position of the company;
- payments to participants from the other participants;
- a short period of existence in the market (less than 1 year);
- no license of the Central Bank in raising funds.
What is MLM-pyramid and a pyramid scheme Charles Ponzi
A pyramid scheme MLM
If each member of a structure makes some initial amount - it says about MLM pyramid. Further, the money is distributed to those who brought a new member of the pyramid and the chain of people who brought inviting. If a new member of the pyramid gives the following participants, part of their money will be his income. This chain operates at all levels of the pyramid.
Fraud scheme pyramid MLM always doomed to failure because it is based on the principle of geometric progression. On this basis, sooner or later there will come a time when people are covering the new level is simply not enough and the last levels of the pyramid will remain without profit. In this case, the upper levels who have managed to accumulate a sufficient amount of money hidden and the pyramid to collapse.
Pyramid scheme Ponzi
At the beginning of the twentieth century, Charles Ponzi during the move to the US he lost all his money, left with a few dollars in his pocket. But since Charles was a savvy man, he took 200 dollars from a friend, and then in 1919 opened the company “The Securities Exchange Company,” which is officially engaged in arbitration deals.
The company Charles was engaged in attraction of investors, which was promised within 90 days to pay $ 1,500 each received $ 1,000. The company lasted about a year until one of the investors filed a lawsuit. During the trial it was discovered that the accounts of the company was USD 4 million, while debt was 7 million USD.
System pyramid Ponzi was simple: each member of the scheme attracted new participants, Ponzi paid with the first members of the funds received from the following members. Yes, a certain time scheme works quite well because investors are investing in a profitable business, not considering that his finances are used for the enrichment of the leader and the payments to investors first levels.
A Pyramid scheme Ponzi is not a profitable venture as anything other than attracting investors, the company is not engaged. That is, more money than you put into it the investors, the company may not pay physically, which leads to the logical outcome – pyramid collapses, and the organizer of the scheme lies with the investor's money.