"the all infamous PONZI scheme," or "HOW THE STOCK MARKET IS IN FACT A BIG PONZI"

http://www.usatoday.com/money/markets/2009-04-17-markets-recession-scheme-ponzi_N.htm

This article I came across last week explains how in a recession, many previously-unknown ponzi schemes come to light. When financiers promise upwards to 20% returns, and diverts money to buy art and pay for a kid's college during a bubble, then we can be sure that they will be exposed when the recession hits.

How does a ponzi work? Well, first check out this
http://en.wikipedia.org/wiki/Ponzi_scheme
but for the lazy man, a ponzi is basically a scheme where the fraud businessman promises high returns for an investment. Some people take him up on the offer, and using the money that new investors put into the system will be used as the "returns" for the older investors. Repeat till new the pace of new investors cannot sustain the output to the old investors. How does a ponzi get sustained for a little while? Bernie Madoff did it by using his credibility to cascade some information down the upper echelon of society to get in on the game and everyone was winning until the recession hit, everyone pulled out and all the money madoff had.... vanished.

In this way, a stock market (at least the way it was run- unregulated of course - during the course of the bubble) is a gigantic ponzi. An arbitrary stock can be used by people to maniuplate the value of the stock to ensure money making. I buy a stock for 1$ and then my friend buys it from me for 2$ and I buy from him for $3 etc etc until we cannot sustain the pace or we artificially inflate the price such that it has nowhere to go but down. But hopefully by then the schemers have made their money or other people get in on the action via an information cascade. Here's an article to corroborate these remarks:

http://www.bloomberg.com/apps/news?pid=20601087&sid=av58Y2LDDHeE&refer=home

Although it may seem so, there are benefits to owning stock in a company other than reselling it a higher price.

First off, by holding stock, you own part of the company, and are allowed to influence its affairs. The more stock you own, the more pull you have (Which is why having a 51% ownership in a company ensures total control).

Secondly, and most importantly, there's the dividend. The company pays a certain amount of its profits to the shareholders, proportional to the price of the stock and how much they own. So, if you're just sitting on a stock that isn't changing, you're still making some money.

The stock market is not a zero-sum game.

I would have to agree with Ian on the stock market not being a zero-sum game. For most people, however, it probably is. Many people probably hold a small portion of stocks in random companies, maybe even in the one they work for, where they might not be paid dividends for some reason or other and hold too small of a share of stocks to actual have control of the company. However, when it comes stocks, it is more of a "croquet game" where nothing remains stable for a long period of time and everyone needs to be aware of what others are doing. (The "croquet game" was taken from this article:http://www.economist.com/business/management/displaystory.cfm?story_id=12669299, which was posted by another user in a different thread.) There can be definite winners and losers in the stock market, not everyone ends up breaking even. If stocks were zero-sum game, then people wouldn't invest at all in the first place, because why invest in something that you do not get gains from. If there was a fixed market, the stock market as well would become a zero-sum game, but it is constantly changing, therefore the market shouldn't be considered a Ponzi scheme.