Is The Stock Market A Ponzi Scheme: A Must-Read For Investors

Have you ever thought about comparing the stock market to a Ponzi scheme? If yes, you have every reason to do so. People who trade in stocks know the risks involved. Your investment can go from thousands or millions of dollars to zero within the twinkle of an eye.

Firstly, both require an investment of some sort. You have to invest your money to get returns.

In both the Ponzi scheme and stock, you could lose your investment. But if everything goes well, you can profit from your investment. Both are high-risk investments. However, Ponzi boasts a higher risk.  

Is the Ponzi scheme the same as the stock market? Here are the simple facts!     

 Is The Stock Market A Ponzi Scheme?

The stock market isn’t a Ponzi scheme and never was. Both operate differently, though both require investors to put in their finances. 

While Ponzi schemes are illegal and unregulated, stocks are the direct opposite. The SEC (Securities and Exchange Commission) regulates the stock market. Thus, companies must register before being listed in the stock exchange. 

Most people will argue that stocks and Ponzi schemes pay investors, so they’re the same. In stock, you could lose money, or your investment could become worthless. The same thing can happen in Ponzi schemes. 

But there is no compelling reason to place both in the same category. All investments come with certain risks. You could either profit from your investment or lose. No investment will give you 100% guarantees to get a return.  

The fact that you can lose money in stock doesn’t mean it belongs in the same category as the Ponzi scheme. In the stock, you can profit when the company makes profit. You only depend on new investments to boost the price of the stocks when you’re considering selling off your stocks. 

The Ponzi scheme is like robbing Peter to pay Paul. When new investors bring in their finances, the scheme organizers use their money to pay off earlier investors and the cycle continues. The Ponzi scheme dies or ends when new investors stop coming.   

Overall, the stock market isn’t a Ponzi scheme. Keep reading for more information. 

 What Is The Stock Market? 

The stock market, also called the equity market or shares market, refers to a place where stocks of publicly owned firms can be bought and sold. Companies sell their stocks to raise capital. 

The stock exchange can be formally or via OTC (Over-The-Counter) marketplaces and must abide by defined rules and regulations. On the contrary, Ponzi schemes (pyramid schemes) don’t follow any defined rules laid by a governing body. 

Instead, the only rules investors follow in a pyramid scheme are those provided by the scheme’s owner or creator. The reason is to ensure the scheme’s sustainability which only lasts for a while. 

A Handy Tip: The stock market and stock exchange are often used interchangeably, but they differ. The relationship they share is that traders in the stock market acquire or sell their shares using one or more of the stock exchanges in the stock market. 

For example, the NYSE (New York Stock Exchange) and NASDAQ are the two leading stock exchanges in the United States of America. 

There’s also a difference between a stock trader and a stockbroker. A stock trader is someone that buys and sells shares. A stockbroker serves as an entity or middleman that helps facilitate stock trades. 

The first stock market started in Amsterdam in 1611, while NASDAQ recorded the world’s first electronic stock market on February 8, 1971.    

How Does The Stock Market Work?

The stock market allows public companies to acquire more investors. The company sells shares to raise capital which they may re-invest to expand or improve the business. 

For example, company XYZ may sell a certain number of shares for ABC amount per share. Investors who believe in the company’s future buy the shares hoping to make some profit. 

People who bought Apple Inc. shares are smiling at the bank, considering the current price of those shares. Apple sold its first shares to the public in 1980 for $22 per share. Today, a share is worth $175. 

There are two ways to profit from shares. The first is to buy them at low prices and hold them. As more investors buy the shares, the price goes up. You can then sell off your shares to make some profit.

Another way you can make money off stocks is via dividends. However, note that not all stocks pay dividends. And the ones that does pay dividends quarterly. 

The dividends are the revenue the company generates within the specified period. And for companies offering such, dividends are paid to every shareholder. 

What Is A Ponzi Scheme?

The Ponzi scheme, or pyramid scheme, is fraudulent and unregulated. They’re practically investment scams. 

Charles Ponzi invented the Ponzi scheme. He was born in Lugo, Italy, in 1882 and moved to the United States of America at 21.

This penniless Italian and gambling addict dreamt of making it big in America. He got arrested for several crimes, including forging a cheque in Canada, and imprisoned for three years. 

Upon his release, he moved to America and started smuggling illegal immigrants. He was arrested and jailed for two years. 

Ponzi then began his fake security and exchange company in the United States of America in 1920, which was a pure scam. He persuaded people to invest, promising to turn a 50% profit within 90 days. 

He lied to potential investors about having plenty of European agents who had purchased coupons he could turn into cash in the United States. 

Regulators busted his lies and jailed him. But before he got caught, hundreds of people had already fallen victims. 

Surprisingly, even after a hundred years, scammers are still operating these pyramid schemes. And people are still falling victims. 

How Does Ponzi Schemes Work?

Those running Ponzi schemes promise high returns to investors. Unfortunately, they cannot provide evidence of their business, product or services. 

Like Charles Ponzi, pyramid scheme scammers ask people to invest their money to get high returns within a stipulated period. 

For instance, a Ponzi scheme operator may ask investors to invest $500 and get back $750 within 120 days. Unfortunately, they don’t have a business that can turn such profit in such a short time. 

Instead, they use money from new investors to pay the existing ones. Such schemes usually collapse when new investors stop coming in or bringing cash into their coffers. 

Sergei Mavrodi is one of the latest Ponzi scheme scammers of the modern day. He was one of the key people in the MMM company, a famous Ponzi scheme that shook the world. It is estimated that around 5 – 10 million individuals lost their investments to the MMM scam. 

Difference Between Stock Market And Ponzi Scheme

Below are the similarities and differences between the stock market and the Ponzi scheme. 

 Famous People That Made Money From The Stock Market

Here are people who have made a fortune from the stock market. They inspire any investor and prove that one can make it big by investing in stocks. 

1. Warren Buffet
2. Ken Griffins
3. Jim Simons
4. Ray Dalio 
5. Carl Icahn
6. Steve Cohen
7. George Soros
8. Bruce Kovner
9. Stanley Druckenmiller 

Conclusion

Is the stock market a Ponzi scheme? This question has an obvious answer. The stock market involves the buying and selling of stocks. And the SEC regulates the stock market too. 

Companies sell stocks to the public as a way of raising capital. But while some pay dividends quarterly, some don’t. The stock market has made many people around the world billionaires and millionaires. 

However, we cannot say the same for Ponzi schemes. They are fraudulent, unregulated investments that have caused significant losses to millions of people worldwide. 

Ponzi schemes work because the money the new investors bring in is used to pay the old ones. And the cycle continues until people no longer invest money, and the system collapses.