Thursday, March 12, 2009

What is a pyramid scheme?

People want to make money quickly and if possible with the least effort. One of the tricks intelligent people have been doing over the years is to established pyramid schemes to take money from these naive people. They make these naive people think that if they invest in a certain schemes they would become rich. A pyramid schemes is thus a fraud whose purpose is to take money from people.

So what is a pyramid schemes?

As the name suggest it is built like a pyramid. It is created by a single person who is at the top of the pyramid and he recruits a few people to invest in the scheme. Each person who invest in the schemes will be told that of he enrolls a few more people in the scheme, then he will increase his return in the long term. Then the chain of people will become longer and longer. In fact as you may have guess the aim of the schemes is to take money from the bottom of the pyramid towards the top. Part of money collected will be used to pay people on the second, third, etc level from the top to make people lower down the pyramid think that the system is working. The system will continue until the system can no longer enroll any more people and money stop flowing in the system. By then people awaiting their return will be suspicious and the person at the top will flee.

People have always been attracted to the idea of making quick money with little effort as a result pyramid schemes have always been successful. It is only when the system has collapsed that people have realized that they have been fooled.

It can be quite easy to recognize a pyramid as most of them simply take money from people at the bottom of the pyramid and then give it to people at a higher level in the pyramid. However some schemes may be hidden behind legitimate business like the Madoff schemes. However these can also be recognised because they offer higher return or they require less effort or work that is generally required in the field. The Madoff schemes were giving 10 % + return even in recessions.

So guys be on the lookout for these schemes and remember always be suspisious of anything that offer higher return in less time and with less effort.

Good luck investing. And remembere true wealth takes time and a lot of hard work to built.

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