Ponzi scheme

Definition:

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.

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day

Risk-averse

Describes an investor who, when faced with two investments with the same expected return but different risks, prefers the one with the lower risk.

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