Multi Level Marketing and Pyramid Schemes, Are They Different?

Multi Level Marketing (MLM) and Pyramid Scheme are in some ways different, but share one thing in common. The people who invest during the later part of the marketing operation or pyramiding scheme are the ones who end up empty handed. .

Back in the days when product brands like Tupperware, Amway, Avon, and The Pampered Chef were still popular, a lot of women found those MLM businesses as good sources of supplementary income. Yet the MLMs of before provided support by training sellers free of charge, and allowed members to sell only on consignment;

Why Today’s MLMs are Similar to Pyramid Schemes

The problem with today’s MLMs is that to become a seller, one must buy into the business by paying beforehand, a subscription fee. In return, subscribing members receive goods to sell equal in worth to the value as the subscription fee they paid.

In order to gain quick returns on their initial investment, they are encouraged to recruit members who will be their so-called “downliners” and earn a commission for every new recruit. In the same way, new recruits will invite friends and family members to join the MLM business, so they can also earn commissions.

The initial recruiter creates her own network of members and from every level, stands to gain a commission on each new recruit, down to the latest level of “downliners.” If they get to sell their inventory, the better; as it means they were able to get back their initial investment. In the meantime, if their network of members keep growing, money coming in as commissions from “downliners,” practically poses as profits realized from joining the MLM business.

This system works well for those who joined early on, but hardly compensatory for late joiners, since the market eventually becomes saturated. Even the product they were supposed to sell, will no longer be viable in a saturated market. That is why MLMs purporting themselves as legit businesses eventually operate the way pyramid schemes do.

How Do Pyramid Schemers Scam People?

Pyramid Schemes basically operate in ways similar to MLMs but are different in some aspects. While MLMs sell a particular product, Pyramid Schemes sell “dreams,” usually targeting people who want to strike it big in as little time as possible.

In a get-rich-quick-scheme, participants need only to convince a specific number of new investors, 3 at the least. The 3 recruits will likewise try to convince another set of 3, and so it goes with every new recruit in each level. In the process, the number of new investors multiply at the bottom line, forming a pyramid with the agents and the founders positioned at the top.

Since every recruiter earns a percentage from the money invested by the network of recruits, those at the top has a longer string of money to claim and collect as earnings than those in the middle and bottom levels of the pyramid. In the event that no more new recruits bring in fresh funds, the scheme collapses; leaving many of those at the lower level of the pyramid with nothing to claim at all, not even the money they invested.

Inasmuch as the founders and the agents are aware when their scheme is about to unravel, they have enough time to pack up and disappear. They will lay low for awhile in order to elude any ensuing investigations. Once the furor over the scam dies down, they will once again start a new pyramid scheme in another location.

Fundamentals of Investing and the Need to Develop Your Own Set of Investment Guidelines

If at the moment you have extra money to use for investment purposes, try not to be in a hurry. Avoid placing funds in some investment scheme that promises big returns with very little risks. More often than not, those types of investment offerings are not built on solid foundations, since “get-rich-quick” schemes have only one purpose, to collect as much money as they can from easy to convince and overly eager investors .

One of the most common misconceptions about investing on shares of stocks and marketable securities, is that it is all about making money by simply putting faith on the recommendations of a financial expert. You also have to think like a business owner who needs to protect a business investment by adhering to fundamental strategies and guidelines.

The Need for Guidelines or Strategies When Venturing into Investment Schemes

Successful investors do not just follow popular opinions, or get swayed by current buying and selling frenzies. They first filter out all the noise, rationalize and then make decisions by working within the framework of their investment methods and fundamental guidelines.

Others call such framework as investment strategies, but actually, most of them are principles or basic foundations of the investment system. They then serve as guidelines on how to manage the ins and outs in investing.

Fundamentals of Sound Investing Practices

Always think of risks when investing, and avoid being reckless, regardless of how much you plan to invest. Consider the following fundamentals of sound investment practices:

Evaluating the Strength of the Company

Always evaluate the company not only by reading the highlights of its financial reports. Dig deeper by looking into who is running the company, and for how long and how well it has withstood the challenges posed by economic conditions. Research about changes in leadership and take note of any improvement or failures that transpired during each tenure.

Make comparisons against price shares and earnings of its competitors as a way of gauging performance, as an investment prospect and as an ongoing business.

Evaluate Your Risk Tolerance

This matter all depends on your need for liquidity and also on your personality. Financial advisers call it investment horizons. It practically means determining the length of time you intend to park your money in an investment product, while considering your future financial needs. Consider funds you need for emergency purposes, or have to set aside for future expenses like money for a child’s college education or for your retirement.

If those factors have to be taken into account, then you have a low risk tolerance. More so if you are the type of investor who easily reacts to volatile conditions that you think will adversely impact your investment.

Keep Investments at Par with Your Level of Competence

Although it is wise to diversify, that aspect does not include extending your investments on businesses of which you have very little understanding. This guideline is important because a limited understanding of the business, also means limited knowledge of the factors and conditions that can influence your investment, either positively or adversely.

Although you cannot control the securities market, you can at least control the risks you face by knowing how to evaluate your choice of investments.

Maintain a Long Term Perspective

Short term goals are great as it gives you assurance of getting returns on your investment in the quickest time possible.

However, do not forget that there are also benefits to long term goals especially if you have already raised your finances to a comfortable level. Every return on investment earned, garners a corresponding tax payment. The tax rate bracket on short term income is higher than the tax rate bracket on long term investments.

Moreover, there is such as thing as compounded interest. This element works to your advantage, because as your invested money grows through addition of interests, the greater the equivalent earnings you will receive in due time.