Are Stock Markets biggest ponzis?

[talknet]

Quote from talknet:

Worldwide Stock markets have provided a "loss of $30 Trillion for Year 2008"

By some estimates, combined losses are greater than $60 Trillion from commodities, stocks, bonds, real estate This is beyond rescue. The chart below, borrowed from Dr. Marc Faber's Market Commentary December 1, 2008, is devastating. The chart shows a stunning loss of $30 Trillion stock market wealth around the world.

http://www.marketoracle.co.uk/Article7923.html

 

[traderyin]

If the company that you invest in is constantly paying out dividends with financing and credit (ei: American Capital), then yes, you are invested in a Ponzi Scheme.

But if you invest in company that actually produce a profit through operation, then no, that is not a ponzi scheme. - even if there are no buyers for that piece of paper tomorrow, but as long as the company is real and operational and generating a profit- you are entitled to the profit distributed.

 

[Pekelo]

I will summarize it so we can close this thread:

Quote from traderyin:

But if you invest in company that actually produce a profit through operation, then no, that is not a ponzi scheme.

Stock markets are similar to Ponzis in 3 ways:

1. They are based on the bigger fool principle.

2. Both needs constant capital inflow for the prices to increase....

3. Beliefs in a stock/market are more important than facts (see bubbles or unreasonable selloffs)

Nothing more to the comparison...

 

[talknet]

Quote from Pekelo:

Stock markets are similar to Ponzis in 3 ways:

1. They are based on the bigger fool principle.

2. Both needs constant capital inflow for the prices to increase....

3. Beliefs in a stock/market are more important than facts (see bubbles or unreasonable selloffs)

Nothing more to the comparison...

The $60 Trillion loss has destroyed the sales future of Giant companies listed on worldwide stock exchanges.

But Stock markets continue to accept money from investors without the Guarantee of production/sales and profit. The very existence of stock markets make people/investors believe they can earn profits without actual sales.

The definition of Ponzi says "accepting money from investors without actual production or sales.

As per above statements "Stock markets are the biggest Ponzis".

 

[nicuss]

Quote from talknet:
The definition of Ponzi says "accepting money from investors without actual production or sales.

That is not the whole definition, only a fraction of it. For instance banks also accept money from investors without any production or sales. So quote a whole definition if you want to argue.

 

[Epiphany]

Quote from talknet:

As per above statement, Stock Markets and Mutual funds are "Biggest Ponzis" because stocks & Mutual funds also display Unrealized profits and unrealized losses.

http://www.time.com/time/business/article/0,8599,1869196,00.html

Is the stock market a Ponzi Scheme?

Strictly speaking, no.

What categorizes a Ponzi Scheme is a business venture where there really is no underlying business operation and the main goal of the business venture is solely to steal money away from those who invested later on, and giving it to those who invested early on.

In the stock market, companies DO have a legitimate business operation.

But you are on the right track in your thinking - the markets are all just a redistribution of wealth (which a Ponzi Scheme is one manner of doing it)

 

[talknet]

Quote from Epiphany:

Is the stock market a Ponzi Scheme?

Strictly speaking, no.

In the stock market, companies DO have a legitimate business operation.

But you are on the right track in your thinking - the markets are all just a redistribution of wealth (which a Ponzi Scheme is one manner of doing it)

What about "daily trading on stock exchange" where a "big investor" will invest $100 million in a particular company and after 1 hour he will sell those shares because the price increased 5% or 10% in 1 hour because of his $100 million alone.

Also what about short-selling? There is no real money in these 2 examples.

 

[ASav]

I agree with your main points that today's market is dependent on the "greater fool theory" and that most "investors" are expecting a higher price to sell as this is there main incentive of investment. However, I would make a couple of points:

1) In theory, as a shareholder, you usually have voting rights. These rights can influence corporate direction. Some investors actively engage the board and management and lobby for changes in the company. See Carl Icahn as an example.

2) I don't know but I imagine that at one time most companies paid dividends as this was the main incentive for investment. At some point, probably in the 80s and 90s bull markets, investor focus shifted from steady dividend income to capital gains. Businesses then would follow the lead of investors knowing that investors want businesses to plow back as much as possible into the company to maintain or increase growth rates and then stock prices leading to even more capital gains.

You definitely brought up a good point with this thread. Kudos.

 

[talknet]

Quote from talknet:

What about "daily trading on stock exchange" where a "big investor" will invest $100 million in a particular company and after 1 hour he will sell those shares because the price increased 5% or 10% in 1 hour because of his $100 million alone.

Also what about short-selling? There is no real money in these 2 examples.

6 months back I had personally seen a "big investor" who invests "big money" in a particular company/stock almost everyday. After some 30 minutes he sells these shares which have increased 3% - 5% because of his "big investment" alone.

There is 100% profit guarantee for this "big investor" and no loss. This is not real money.

 

[makloda]

Quote from talknet:After some 30 minutes he sells these shares which have increased 3% - 5% because of his "big investment" alone. [/B]

You fail to mention he also suffers 3% - 5% slippage on the way out, making the entire "moving the markets my way" exercise a zero sum game minus commissions.