There are a lot of smart people here, and a lot of people who think they are smart.
How is the Stock market not just a big pyramid scheme?
Because it is based on things that have actual value…The old pyramid schemes I remember were base on just physical money. Plus it is not based on there having to be more and more people to keep it alive, it self corrects every decade or so and begins anew, selling actual things, usually…(-;
Now for sure some individual stocks act like pyramids, some blow up just like them too, others like Amazon eventually prove their pyramid valuations. Right now I see Bitcoin, Tesla, and a few others acting like they are pyramids, but the overall market just absorbs them and continues on in spite of a few companies with irrational exuberance. Some of you in the business will remember that slogan…
Because it is based on things that have actual value…The old pyramid schemes I remember were base on just physical money. Plus it is not based on there having to be more and more people to keep it alive, it self corrects every decade or so and begins anew, selling actual things, usually…(-;
Now for sure some individual stocks act like pyramids, some blow up just like them too, others like Amazon eventually prove their pyramid valuations. Right now I see Bitcoin, Tesla, and a few others acting like they are pyramids, but the overall market just absorbs them and continues on in spite of a few companies with irrational exuberance. Some of you in the business will remember that slogan…
But there is no real value there. If you run out of buyers, the whole thing will collapse.
In addition to the question of value, the stock market is also structurally not pyramidal. When you sell a stock, you get to keep the proceeds. The original seller of the stock (the company) gets nothing. In pyramid schemes each sale filters all the way up.
Some aspects used to be more pyramid-like with the fee-based commissions all filtering up to elite brokers. But the “load” has been driven so low in recent decades (thanks, Bogle!) that stock ownership is more egalitarian now.
But there is no real value there. If you run out of buyers, the whole thing will collapse.
Why would it collapse? All the original stockholders can play the long game and hold on if they want to. The company already acquired its capital on the original sale of stock.
But there is no real value there. If you run out of buyers, the whole thing will collapse.
Why would it collapse? All the original stockholders can play the long game and hold on if they want to. The company already acquired its capital on the original sale of stock.
Well, many of us are saving in the market to use the money for retirement…at some point you have to sell to live, you can’t hold forever - I think there is some “truth” to this being “like” a pyramid scheme. I think the birth rate in the US while better than many countries will impact us is so many ways, specifically future stock prices. You have to have buyers.
But there is no real value there. If you run out of buyers, the whole thing will collapse.
By that definition almost every asset class is a pyramid scheme. I think what you are referring to is the fact that for every seller there must be a buyer.
Spent $1,000,000 building a house? Is it worth $1,000,000? Only if someone is willing to pay you that much.
Same for a $100,000 house or a $20,000 car or a $5 sandwich. Now it might be easier to see the intrinsic value in those things than in a stock but consider that a share of stock is a claim on a company’s earnings (some of them even pay dividends). Otherwise I’ll refer you to Trail’s comments rather than repeat what he said.
…however, if you have a sinking feeling in your gut that younger generations cannot afford to buy your stock from you for what it is theoretically worth today, you’re probably correct.
I think there is some “truth” to this being “like” a pyramid scheme. I think the birth rate in the US while better than many countries will impact us is so many ways, specifically future stock prices. You have to have buyers.
I would say there’s some truth to some stocks being subject to irrational speculative bubbles. I wouldn’t use the term “pyramid.”
Pyramid schemes are based on memberships. The Tesla example would be Elon being the stop of the pyramid and telling 10 people underneath him, “You have to pay me $1M per year to be a Tesla owner.” Then those 10 people each recruit 100 people and tell them, “You have to be pay $100K per year to be a Tesla owner.” And on and on.
That’s not how stocks work.
Coca Cola pays $40/cents per share per quarter to shareholders because people buy Coke and that generates profit. Not because Coke shareholders are recruiting new buyers for stock.
Tesla shareholders are speculating that Tesla may one day mature into a company that generates a profit based on the sale of scares. That may all blow up, and all the shareholders could lose their investments. That’s the speculative part.
But if there was no risk, there’d be no return.
Your view seems a bit old school to me.
I don’t see it as a pyramid scheme- but simply legalized gambling.
I think the index funds have fundamentally changed the market. I work for a big company ~33% of our shares are owned by index funds. They really don’t buy like you called out caring about our future. Never before have we had that amount of basically disinterested owners. (Assuming before the mutual fund management cared- even if individual fund owners didn’t). It’s a very strange position to be in.
Index funds were one thing when they were <10% of the market - but they are a very large, very weird fundamental of the market now. There is a momentum force we have not seen before of this magnitude. I really wonder how this will shape the next downturn.
I don’t see it as a pyramid scheme- but simply legalized gambling.
Well all investment involves some level of speculation, and it is legal.
But it’s not gambling other senses. E.g. in the Coca-Cola example, there isn’t a lot of gambling in buying “income stocks.”
I agree that shareholders becoming increasingly divorced from the practice of diligent corporate ownership is a brave new world.
In addition to the question of value, the stock market is also structurally not pyramidal. When you sell a stock, you get to keep the proceeds. The original seller of the stock (the company) gets nothing. In pyramid schemes each sale filters all the way up.
Some aspects used to be more pyramid-like with the fee-based commissions all filtering up to elite brokers. But the “load” has been driven so low in recent decades (thanks, Bogle!) that stock ownership is more egalitarian now.
So the first in the company… sells the stock gets value out, guy who bought it, waits for hopefully at least 2 buyers so they will compete and drive his value higher, they wait for more people to sell to to drive price higher etc… until… no one is there to buy, everyone starts lets say retiring and wants cash, now more and more sellers less buyers, value plummets first in’s made their money, last in’s get left holding the bag.
Sounds just like a pyramid scheme to me. The only value a company really has is its assets and with more and more online virtual companies the only assets are some computers, server networks and their real estate holdings.
But there is no real value there. If you run out of buyers, the whole thing will collapse.
By that definition almost every asset class is a pyramid scheme. I think what you are referring to is the fact that for every seller there must be a buyer.
Spent $1,000,000 building a house? Is it worth $1,000,000? Only if someone is willing to pay you that much.
Same for a $100,000 house or a $20,000 car or a $5 sandwich. Now it might be easier to see the intrinsic value in those things than in a stock but consider that a share of stock is a claim on a company’s earnings (some of them even pay dividends). Otherwise I’ll refer you to Trail’s comments rather than repeat what he said.
…however, if you have a sinking feeling in your gut that younger generations cannot afford to buy your stock from you for what it is theoretically worth today, you’re probably correct.
Yes, except you at least have a house, you live in it provides shelter, I never look at my house as an investment, its housing, I will always need a place to live. My car is not an asset it is worth nothing, (especially if you lease) (but yeah many “collectors” think baseball cards in particular learned about this the hard way)
… or if there are less in that younger generation who want to buy in.
Your view seems a bit old school to me.
I don’t see it as a pyramid scheme- but simply legalized gambling.
I think the index funds have fundamentally changed the market. I work for a big company ~33% of our shares are owned by index funds. They really don’t buy like you called out caring about our future. Never before have we had that amount of basically disinterested owners. (Assuming before the mutual fund management cared- even if individual fund owners didn’t). It’s a very strange position to be in.
Index funds were one thing when they were <10% of the market - but they are a very large, very weird fundamental of the market now. There is a momentum force we have not seen before of this magnitude. I really wonder how this will shape the next downturn.
Don’t forget computer trading, people are not driving the market the machines are.
It like a pyramid scheme (when recognized as one) is gambling in the sense of can I get out and leave someone else to lose before it all collapses. In gambling say a horse race, your betting on an outcome of an event, not finding someone else to pay you and assume the risk of losing it all.
That’s not how stocks work.
Coca Cola pays $40/cents per share per quarter to shareholders because people buy Coke and that generates profit. Not because Coke shareholders are recruiting new buyers for stock.
Tesla shareholders are speculating that Tesla may one day mature into a company that generates a profit based on the sale of scares. That may all blow up, and all the shareholders could lose their investments. That’s the speculative part.
But if there was no risk, there’d be no return.
So since GM pays such a bigger dividend then Tesla it clearly has a higher market cap is worth more? Coke and GM pay a dividend to satisfy it stock holders to hang on cause they are running out of demand for their stock so to prop the price up till the executives can cash out there options they offer a dividend. Corp. Market prices are being propped up by companies so in the short terms this years exec can get their money out of the shares they own in a few years.
Just wondering how long till it goes POP and we start all over… I mean if there were real value here the POP shouldn’t happen. Why would I see my stock for less if the company really has value.
But there is no real value there. If you run out of buyers, the whole thing will collapse.
By that definition almost every asset class is a pyramid scheme.
…however, if you have a sinking feeling in your gut that younger generations cannot afford to buy your stock from you for what it is theoretically worth today, you’re probably correct.
Yes and I think if this were openly discussed in these simple terms a much larger percentage of Americans would get understand.
For something to worth anything, there has to be someone willing to buy it at that price.
I hang out on few other forums for old cars and old mechanical calculators. Often someone will ask whats this worth… then a multi post thread begins explaining if you own it, it is worth what you are selling it for and if your buying its worth what your willing to pay… transactions happen when a buyer and seller with overlapping valuations meet.
Sounds just like a pyramid scheme to me.
It’s not. I don’t think you really want to be educated on the difference between a pyramid scheme and one of the greatest financial innovations in human history - public ownership. You’re just using this as a way to air your grievances the latter.
So since GM pays such a bigger dividend then Tesla it clearly has a higher market cap is worth more?
No, dividends have nothing to do with market cap. Market cap is the value of all shares. Dividends are a disbursement of profits to shareholders. Less mature companies generally don’t pay much in the way of dividends because shareholders prefer they pour the money back into capital expenditures in order to grow, innovate, and expand market share. Once companies stop growing quickly because they’ve “won” and carved out a good portion of the market are expected to then pay some money back to shareholders.
Coke and GM pay a dividend to satisfy it stock holders to hang on cause they are running out of demand for their stock
No. You’re implying that Coke and GM use regular new sales of stock in as a source of operational revenue. That’s not how mature companies work. The acquire operational revenue from sale of products. They may buy and sell stock from internal supplies to regulate price and for capital expenditure, but they’re generally not selling “new stock”. Immature companies like Tesla may have to raise capital through periodic sale of new stock. But that’s all public knowledge, so existing stockholders have full knowledge of the effects of dilution of the value of older stock. This is why the SEC has requirements for reporting. This differs form pyramid schemes where the “dilution” is kept secret. E.g. new recruits are generally kept in the dark about the business model.
This differs form pyramid schemes where the “dilution” is kept secret. E.g. new recruits are generally kept in the dark about the business model.
This. The business model of a pyramid scheme is to take in enough money from new investors to continue to pay a huge dividend to all investors. There might not be any business involved other than the collection of new investor money. The huge dividend attracts new investors and the scheme is perpetuated until either the owner flees the country, or new investments are not sufficient to continue paying the dividends and investors withdraw money, or investors become suspicious of the huge investment returns and start withdrawing money. Bernie Madoff is an example.
Your basic public company is not selling more and more additional stock in order to raise money to pay a dividend. They are usually paying a dividend out of earnings. Yes, a stock will collapse if everyone sells or if people stop buying their widgets but that’s the simple economics of EVERYTHING.
So since GM pays such a bigger dividend then Tesla it clearly has a higher market cap is worth more?
No, dividends have nothing to do with market cap. Market cap is the value of all shares. Dividends are a disbursement of profits to shareholders. Less mature companies generally don’t pay much in the way of dividends because shareholders prefer they pour the money back into capital expenditures in order to grow, innovate, and expand market share. Once companies stop growing quickly because they’ve “won” and carved out a good portion of the market are expected to then pay some money back to shareholders.
Coke and GM pay a dividend to satisfy it stock holders to hang on cause they are running out of demand for their stock
No. You’re implying that Coke and GM use regular new sales of stock in as a source of operational revenue. That’s not how mature companies work. The acquire operational revenue from sale of products. They may buy and sell stock from internal supplies to regulate price and for capital expenditure, but they’re generally not selling “new stock”. Immature companies like Tesla may have to raise capital through periodic sale of new stock. But that’s all public knowledge, so existing stockholders have full knowledge of the effects of dilution of the value of older stock. This is why the SEC has requirements for reporting. This differs form pyramid schemes where the “dilution” is kept secret. E.g. new recruits are generally kept in the dark about the business model.
This is the best information on this thread.
To expand from the beginning… this is how stocks work.
He share of stock is the value of the company, divided by the amount of shares outstanding. If the company is worth $100, and there are 100 shares, each share is worth $1. On a basic math scenario for explanation. Obviously, a company will be worth more than $100.
The companies value is simply based on earnings or sales ratios. Now, it seems you are arguing the value being smoke and mirrors. Long story short, a growing companies value is based more on future earnings and expected sales growth. When the growth slows, the stock price quickly falls. When growth is more than expected, the stock price quickly rises. When growth slows down, profits become more important. At the end of the day, a company is always worth what its assets minus liabilities are worth. So, a stock should always have that value. Even if the value never rises, an investor would still be willing to hold the stock and not sell it as they have the right to earnings through dividends. So, the dance is done between investors and the board of directors. The board knows if they don’t pay the investors dividends, they will sell the stock. So, if the company isn’t growing, it’s an implied scenario that investors demand dividends.
You make money as an investor through a rising stock price, or by being paid dividends. Not really a pyramid scheme at all. Amazon is a good example of growth. I stayed away from the stock as it had huge expected growth numbers. Frankly, I found it impossible to meet year after year. Sure enough, they did it. Amazing. Although, as an investor, I felt it to be too risky. The people that did buy amazon years back benefited handsomely. Exxon Mobil is a great example of a dividend stock. People invest in different things for different reasons.
I give you Woodford…
I give you 🦄 worth multi-billions losing money hand over fist
I give you the chase for 7.5% per annum
What happens when pension funds or other large investors want to make with draws from supposedly liquid assets but the money is not there
Properties - those in their 20’s and 30’s unable to purchase now, are they really going to be able to pay the price expected by current sellers who want to move or downsize?
I fear a readjustment…