Your Questions About Stock Market Is A Ponzi Scheme

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Chris asks…

If you believe that buying and selling stocks is a “Ponzi scheme,” can you tell me why?

Many questions in this section have made this assertion from time to time: If you buy or sell stocks on a public exchange (NYSE, NASDAQ, etc.) people say it is aPonzi Scheme.”

As I understand it, a Ponzi scheme arises when early investors in the scheme are paid exclusively from contributions from later investors, and inevitably, the scheme will collapse once later investors cannot be paid.

So tell me: Why is Wall St. investing always a Ponzi scheme according to the definition above?

I would be especially interested to hear from people who believe Wall St. is a giant Ponzi scheme, but also support capitalism.
I know there are some crooks on Wall St. Bernie Madoff ran a Ponzi scheme because he never invested the money that was given to him. I get that.

But I’m asking about people like this questioner, who got enthusiastic responses to his question that claimed Wall St. was nothing but a giant Ponzi scheme:

http://answers.yahoo.com/question/index;_ylt=ArlrHODGW_xjYfocnJS44bDY7BR.;_ylv=3?qid=20090519141143AAmCfrY
Brokers do get paid when you buy or sell. That’s because you’re paying them for a SERVICE–putting your shares up for sale or going out and buying them for you.

There’s a lot of bad information out there. People urge you to buy when you should sell and vice versa. How does crappy information constitute a Ponzi scheme?

Justin answers:

I know what a Ponzi scheme is and I know how the stock market works. They are not the same.

The people that say it is probably have never owned a stock.

Michael asks…

Why Is Wall Street Bad?

Why do people hate wall street? I just want the legit facts about wall street, and does anybody know specific stories about wall street, and why they are bad? I have to write a paper on Wall Street, but I can’t find anything bad on wall street and why people hate wall street. All I know is that it’s a stock market, but if someone could give me encyclopedia and facts on why Wall Street is hated, then please answer. Thank you.

Justin answers:

It’s too complicated to explain in a few sentences.

Wall Street as a concept isn’t ‘bad’ – it’s just people buying and selling shares in companies and those shares are priced based on the current and projected earnings of the company.

The stock market allows business owners to build up a business and then ‘share’ it with the world, thereby reducing their share of the business in exchange for cash. So you build a business, you take it public, you own 100% of that company in the form of shares. You sell 50% of your shares to people who want a piece of your company, in exchange you get money. They in turn get a piece of your company and if profits go up the shares become worth more.

Anyway, that’s the good side of wall street.

The bad side is too complex to talk about. But essentially the bad side all comes down to manipulating the markets. You might call it ‘pump and dump’ – hype stuff that is wrothless so that everyone wants to buy it, then when the price goes way up, dumping it and making a killing, leaving other people holding the bag on a bunch of worthless debt or equities. Essentially, it’s a ‘legal’ way to steal millions/billions/trillions from people.

So wall street gets ‘main street’ (in the form of pensions, mutual funds, etc.) to buy things that are worthless and then when its discovered they are worthless, the guys on wall street have all the money (because they sold stuff) and the pensions and mutual funds and 401ks are all worth nothing (enter Ben Bernenke and the gov printing trillions to artificially inflate the market so that stock values don’t crash down to being worth nothing – like in the great depression).

Anyway, you get the drift. It’s just a series of ponzi-like schemes where people on wall street fuck over everyone else (and yes, at times they even steal from each other!!!!).

James asks…

What is bad about a ponzi scheme?

If I’m wrong please politely correct me.
I don’t know a great deal about finance but I can tell you what a ponzi scheme is, the new investors’ money goes to the older investors. It generally works unless the market crashes and people start demanding money and others stop putting new money in.
Everyone’s problem with them seem to be that people can loose there money but they seem to ignore the fact that plenty of people made good profits on them, they also never seem to mention that ALL investments carry a risk of loss, stocks, real estate, etc…however, I never see the CEO of Investment Firms going to prison.
I’m just wondering what the deal is, why are ponzi schemes and their managers so hated? Is the hatred of these things just a distraction from the “legitimate” Wall Street executives that make a profit off of greed? Is there something I’m missing, if so please politely point it out. Thank you!

Justin answers:

There is an element of fraud in a ponzi scheme. If you put your money in a bank, there is a microscopic chance that the bank will fail and you’ll lose your money. (Think of “It’s A Good Life,” a popular Christmas movie in black and white.) Sure, every investor takes a risk. But the common goal is to minimize the risk. A ponzi scheme is fraud to begin with- I promise that you’ll earn huge income because if you give me your money, my market smarts will make you rich. It’s not my market smarts, but the next investor that makes you rich. Then the third investor pays the first two, and so forth. Eventually, the whole house of cards collapses and it becomes obvious that the get-rich-quick scheme had nothing to do with my market smarts but with selling to greedy but gullible investors.

Since all investments have some risk, does this eliminate the fraud associated with a ponzi scheme? No, it does not. Are there Wall Street types who are greedy? Sure. But their collective greed doesn’t mitigate a ponzi schemer. Take care!

David asks…

What causes global economy crisis? name the single main culprit?

Justin answers:

I blame deregulation of financial markets as the main culprit. Mortgage lending was turned into a giant Ponzi scheme, and investors all over the world were duped into buying toxic stock options.

Donald asks…

Is this what the Global Warmists wanted?

You will be able to buy, sell, and trade carbon credits on the STOCK MARKET! When will you learn this SCAM has nothing to do with the enviroment!
http://www.bloomberg.com/apps/news?pid=20601109&sid=aPQlqDUndiLY&refer=home

Justin answers:

Its a worldwide Ponzi scheme and AL Gore is Maddoff.
GE has useless Carbon Credits right now and waiting to sell them
off . GE stocks is worth about $2.00 .
Some of the Democratic Senators and Congress persons might
have their hands in that cookie jar. Follow the money!!

And when that bubble burst when Global warming is shown to be a lie.

Daniel asks…

Who do you trust, a Independent Advisor or a Bank?

Justin answers:

I am with @Common Sense and @Steve on this one

A bank “adviser” is just a salesman they will only direct you to products that the bank has to sell.

An “independent” adviser is probably not as independent as he/she would have you believe…He may form alliances with non-bank financial firms who may be more dodgy than relatively safe banks.

In both cases if you just throw money at them and tell them to make you money…..they will not necessarily chose wise investments….If you are in the stock market. They may churn your account. At the very worst they may be ponzi scheme artists of the Bernie Madoff (sp?) type

Learn how to do your own investments…you will never regret it…it is called peace of mind…(those who play the market and have no peace of mind….have not learned how to do it properly)

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