Is the Stock Market a Ponzi Scheme?
Many people think a stock goes up based on earnings and growth of a particular company. Investors are looking to predict if a company will go up in earnings and growth in order to invest in it.
What makes a stock go up isn't produced by the earnings and growth of the company. The whole way the stock market works is by buying and selling which influences the supply and demand value. If people are selling low, the value goes down. If people are buying high, the value goes up.
Source
For a stock to go up in value, it needs an investor to buy stock and increase the value of that stock in the stock market. They need to be buying from others who are selling at a higher price that the current market value. That makes the stock go up. If someone sells lower than the stock market value, then the current price lowers to what people are currently paying for it.
A stock will rise when more demand is there for it. This means that people selling the stock will be selling it for more than it is currently being valued at the price it was previously being sold at.
If people are willing to pay more than the current stock value because they think the stock will go up in value and they can make money from it, then they will buy it, and that will itself increase the value of the stock.
If people sell the stock because they think it will lose value, then they want to get out while they can make profit from when they previously purchased it, or cut their losses and sell before they lose too much. As they sell their stock for less than the current value is at from previous sales, then the stock value reflects those new transaction values.
The way that earnings and growth does have an influence on stock market value, is purely speculative. This speculative connection is based on predictions to foresee that people will be drawn to buy or invest in a stock because the earnings and growth are positive.
But in reality, those people and other people are the ones who make the price go up by buying the stock. They are all caught in a self-fulfilling prophecy that creates the rising value. Investing in the stock and making sellers raise their prices for those who are willing to pay higher prices is what makes it go up in price further.
Ponzi schemes work the same way, with speculation nth value of something. It's not bases in any reality of the earnings or profits the company makes itself. When new investors stop buying into the Ponzi scheme, there is no more money to be injected, and it collapses.
This is the same thing that happens with market bubbles. People buy, buy, buy, buy, buy... and this cascades into more buying, buying and buying as people think want to get in on the easy money FOMO and then the value inflates high. This injections can only go on for so long as people are willing to buy and inject money.
Then some large whale starts to sell because they want to make a profit from the price they paid low by selling high. Then more people sell, worried the price will go down. And it does, because people are selling it for less than the current average of value based on previous buying levels. The price keeps dropping. As more people sell, sell, sell, sell, more people try to get out before the bubble deflates completely and by selling, selling and selling, and hope to gain a profit or cut their losses.
This is the game and money 'magic' of capital gains and markets. It's all one big scheme to play around with money by gambling it with predictions of a future outcome. But it's not even like gambling where the outcome is based on something neutral like a deck of cards or a ball in roulette. The gambling is based on predicting if people will buy more or sell more to increase or decrease the value of the stock.
A Ponzi scheme is:
- an investment scenario
- the investment profits come from other investors
- the investors think the profits come from somewhere else
The stock investor/seller sells their stock to another investor/buyer, and that is where all the money comes from.
If someone knows the profits don't come from a company itself, and know the profits they can make are based on the buying and selling behavior of investors to create bubbles to profit from, then point 3) doesn't apply, but the first 2 points still do. It's all a gamble and money 'magic' game.
No one is actually doing anything other than playing around with money. No actual value is being created by this behavior. The way value in the real world can be created is when the company sells the stocks to investors initially or later, and gets money to spend into their company. That's how stocks create value for the company to grow by investors giving them money.
By the way, the way the stock market works is the same for cryptocurrencies. People sell, and others buy, either for more or less than the current market valuation based on previous buying and selling behavior. If a bunch of people think the value of a crypto is going up, they have FOMO and self-create the self-fulfilling prophecy of the price going up.
This is how pumps and dumps work. Pumps and dumps are done in the short term, but over the long term bubbles in the market of certain investments can be created, where the value rises, people sell, the value falls, then people buy low and sell high repeating the same pattern over and over again.
All the money some investors make is from other investors losing money. That's how it all works. Markets collapse when the bubbles pop and everyone runs to sell and get their money out of the digital abstraction in the market. It's an imaginary asset value, not real money until you "cash out" and get real cash from it to use in the real world. Then the ones who sold high can buy it all up low and keep reaping and fleecing the suckers who got in at a higher value but are selling at a loss.
This is how the stock market crash of the 30 and other successive crashes have redistributed wealth in society, where the rich get richer by understanding this money 'magic' game.
Cryptocurrency has one advantage that makes it better than regular money 'magic' game schemes, is that the goal is to use it as real money to buy good and services in the real world. Cryptocurrency has the potential and goal to be more than a mere imaginary asset value. Bitcoin has been used to buy real products in some businesses, so has DASH and other cryptos. The crypto market is superior to the traditional market in this way, despite still being driven by the same old psychological money 'magic' gambling game. All markets are gambling, but crypto can often be used to spend and buy in the real world like standard fiat money can.
Thank you for your time and attention. Peace.
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I have always been curious about investing in the stock market but I would never take that risk since I have no experience ..
It is a good point to know why an action goes up or down. One of these days I'll take a few dollars to invest in trying luck.
Good luck when you do try ;)
Whether the stock market is a Ponzi scheme or not....someone on top is calling the shots and NOT the investors or the market.
That's why I stopped investing in Stocks.
Good move then ;)
Firstly, seeing as how it's based on fiat and
then gets even more ridiculous from there.
I would say yes, it most certainly is a Ponzi.
That's crazy I'm finding this post right now, the timing couldn't be anymore perfect. I was just coming to many realizations the other day regarding the market, I pretty much came to realize that the stock market is really a ponzi scheme when the only way you can profit is by selling your stock to someone else at higher price. Where with crypto, many systems have opportunity for you to earn just by contributing to the system's network and never having to actually sell your coin. I'm sure you are already familiar with ways to earn without selling since you are on Steemit!
Great post, thanks for your time and contribution!
You can profit through dividends in stock
The general way the whole market works is pretty schemey. People play the game of trying to predict when it goes up and down, or hold on in hopes it goes higher so they get a small part. But it goes higher because people buy on predicting it will go higher and that makes it go higher.
Indeed it is a ponzi scheme with the markets and the yield curve is flattening every day. Across the pond in already has inverted. It also inverted in 2008 before the crash and also in 2001. The difference between the 10 and 30 year bond is less and less. Perhaps you remember the 1988 Economist magazine cover of the phoenix rising from the burning ashes of dollars. The pump and dump scheme is common and that money does not disappear. It only is transferred to someone else.
It also reminds me of an poem I wrote months ago.
DOW JONES CASINO
markets are being rigged and nothing is real.
Come down to the casino, we'll make you a deal
The bonds are propped so stocks may sour
the metals are uncool if you want to make more
So open your wallets and poor in some cash
and see how the markets will rise in a flash
I tell you my friend what goes up must come down
when the casino goes bust and your left with a frown.
Hehe, good poem ;) Money indeed just changes hands.
Dividends are most definitely paid out of a company's earnings. Companies can also buy back stock with their earnings, which reduces supply (shares bought back are removed from circulation) and drives up the price.
Yeah sorry, I misworded things from going off of what the material was saying. There are some honest dividends like you say. Thanks.
I am afraid, i don't agree with you on this one. If a stock goes below its book value, it will quickly jump beyond that point. Stock value is loosely based on book value + order book + future outlook. That where PE ratio comes in and if PE ratio becomes ridiculous, than it will quickly fall down bringing the price down with it (or higher earning).
Earning (and next quarter outlook) are still the biggest events for a stock.
The current value sure, the order book is not going to make the price go up, otherwise all that would be required is for people to place orders and it would rise on it's own without anything real happening. The book order affects psychological buying pressure. The future outlook is the same. Future outlook doesn't make the price rise, people buying based on the future outlook does.
I remember that in my country there was a similar case in 2005 called "La Vuelta" People involved in the case gave their dollars after negotiating exorbitant interest, which even reached up to 20% per month. With this scam, for two years my city Maracaibo was flooded with dollars, luxury cars and a lot of waste.
"Is the Stock Market is a Ponzi Scheme?"
Yes!
I beg to differ on this.
I think there is fundamental value in stocks and it is driven by the companies' business activities. You are right in saying that most people speculate on the stock price without much consideration of the intrinsic value. But to equate that as a Ponzi scheme, I think that's a little overboard.