What is a Ponzi scheme?

Answer 1

A 'Ponzi scheme' is a scheme in which investors are promised extraordinary returns, but meanwhile these returns are simply paid out from the inflow off new funds from new investors in the scheme. This is much like a pyramid scheme and results in an eventual collapse in which investors lose most -- or all -- of their money.

Answer 2

A "Ponzi scheme" is a way to trick investors.

The broker (money maker) promises unusually high returns (10-50%) by investing their money in some amazing scheme: a money exchange, Stock Market trades, new products, etc.

When the time comes, the client is given back part of their own money, which is supposedly the interest being made. The client is convinced to keep the rest of the money invested with the broker and they may even greedily return the money which was just given to them, for future dividends.

Bernard Madoff famously used a Ponzi Scheme to attract rich clients and explained his returns as an uncanny ability to invest in stocks. Charles Ponzi, the originator of the scheme, claimed to be using some loop-hole to buy stamps at a high exchange rate.

Once people are convinced you can make good money your reputation soars and investors are giving you money left and right. When individuals demand payment, money is always available from the new investors.

In this way, it is not dissimilar to a "pyramid scheme".

In Charles Ponzi's original scheme no attempt was made to invest any of the money. He paid people to find investors for him and spent the money on himself and his family; eventually going broke after being publicly questioned about his methods and being charged with mail fraud.

In both cases the investors lost huge amounts of money.