Exploiting price discrepancies in different markets of an identical or similar asset is not an illegal practice, contrary to what many Ohio residents think. This practice often generates low profits at low risks-the seller is simply buying in one market while simultaneously selling in the other. For example, a stock may be trading at $10 in one market and $10.10 in another. A trader would buy it at $10 and sell it at a higher price in the other market. This type of low profit sale is actually encouraged in some markets to erase market inefficiencies.
This scheme, known as arbitrage, is not to be confused with investment fraud such as Ponzi schemes. A Ponzi scheme offers little risk to investors, similar to arbitrage, but offers a large profit. This promise is generally fulfilled by attracting new investors and using their investments to pay off older investors. This is why it is also referred to as a pyramid scheme. But without enough money to go around for everyone, the pyramid often ends up collapsing and ruining everyone involved in running it.
With new technology, Ponzi schemes have also evolved but most of them share the same characteristics. There is a consistent flow of returns regardless of the market conditions through investment strategies that are qualified as too complex to explain. Clients are not allowed to view the paperwork for the investment and they face difficulties removing their money. This is because their money has usually already been used to pay off older investors.
Regardless of what the investment entailed when it began, if it involves fraud of any kind, it can cause serious legal repercussions. When the scheme falls apart, the person responsible for running it is often left facing a barrage of embezzlement charges that carry severe penalties including prison time and restitution.