Is Stock Investment Ponzi Scheme?
I have previously wondered whether stock investments werenâ€™t actually a Ponzi scheme. And Iâ€™ve had cause to ponder deeply how the money is generated when one makes a profit in their stock trading investments. You buy a company stock for $1 and a couple of weeks later the price goes up to $2 and you sell it to make a dollar gain.
The reverse happens if the stock price goes down, to say $0.50 where you lose $0.50. You only make a profit when the stock price goes up. Now what makes a stock price to go up or down?
Iâ€™m neither a stock broker nor stock investment expert, but having invested in stocks the first time without adequate knowledge about how it works and got my fingers burnt, I needed to sit down and ponder on this thing called stock investment.
In my simple understanding, stock prices go up when investors think the price will rise in future, and so start buying. At this instance, more people are looking to buy than those wanting to sell, therefore, the price goes higher as the law of demand and supply is obeyed (the higher the demand, the higher the price).
On the other hand, if investors think the price of a stock will fall in future, the tendency is for them to start selling to avoid selling low later. This will result to having more people wanting to sell out than those wanting to buy, and again, the law of demand and supply will be obeyed with the price falling (the higher the supply, the lower the price).
As I wondered on this thing, I realized that what determines profit or loss for investors is purely Speculation. Itâ€™s all about how people think about the future price of stocks, which you donâ€™t have control over.
If you own a stock that you wish to sell and other investors donâ€™t think its price will appreciate in future, you will have to hold your stock until the time they will think so or be prepared to sell at a lower price.
The critical point about making money from the stock market is that if money doesnâ€™t come into the market by way of new investors buying, no profit can be made by other investors.
This is why I agree absolutely with Robert Kiyosakiâ€™s assertion in his latest book, Rich Dadâ€™s Conspiracy Of The Rich: The 8 New Rules Of Money that the stock market is a Ponzi scheme. (By the way, I strongly recommend you read this book if you are an investor or are interested in investing.)
Just in case you donâ€™t know what Ponzi scheme is, I will explain briefly: Ponzi scheme is â€œa fraudulent investment that pays investors from their own money or pays investors from subsequent investorsâ€™ money.â€
The term â€œPonzi schemeâ€ was named after Charles Ponzi after he was convicted of deceiving investors in 1920.
A Ponzi scheme entices people to invest with the possibility of making huge returns on their money without doing anything. The first set of people to invest is probably paid from their own money or from the operatorâ€™s purse. With this fraudulent evidence that people have been paid, the next thing that will happen judging by human behavior is that the scheme will be stormed by thousands of people hoping to make money from it too.
The scheme will continue to thrive, even for many years as long as new people continue to invest â€“ there will be money to pay those who invested earlier. It was not until December 2008 that the world got to know about Bernard Madoffâ€™s Ponzi scheme, after operating for many years, and stealing more than $65 billion belonging to investors.
Ponzi schemes operate using different models, and you can find them anywhere, both online and offline, but, you will know them by one feature: they always require new investments to come in for existing investors to make profit. And this is same for the stock market.
As Robert Kiyosaki well observed in his book, for prices to go up in the stock market, new money must come in, if it doesnâ€™t or if people pull out their money, the market crashes, as was experienced recently. For this, the stock market therefore seems to be a legalized or government supported Ponzi scheme.
Therefore, to play and win in this legalized Ponzi scheme, you really need to know what you are doing. You need information â€“ you need to know why you are buying a particular stock, and not because everyone thinks itâ€™s hot. I followed what everyone said and lost lots of money buying some stocks before getting to understand what I was doing.
There are those I will refer to as hawks in the market who are big and experienced traders. They usually take position to offload their stocks on unknowledgeable fellows. They make huge profit and move quickly out of the market, leaving the unsuspecting investor with stocks that will soon begin to fall in price.
Again, I emphasize: to play and win in this legalized Ponzi scheme that the stock market appears to be, you need deep information about how it works, and the stocks you want to buy before going ahead to acquire them.
I will like to stop here, but I want to hear from you. What is your experience about the stock market? Please leave your comments.