I am a huge advocate for buying stocks, massive, if need be. The cold-hearted and bold persona has never scared me but rather exhilarated me and my love for the dynamic ride but as soon as I saw stocks such as Tesla and Amazon increase by over 70% than they were when they were introduced, I’m questioning my beliefs.

Is the stock market one giant Ponzi scheme?

• A Ponzi scheme according to Investopedia, is “a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers.”

“Both Ponzi schemes and pyramid schemes eventually bottom out when the flood of new investors dries up and there isn’t enough money to go around. At that point, the schemes unravel.

The idea that the stock market could possibly just be Ponzi scheme came from Tan Liu who wrote the book “The Ponzi Factor.” Tan Liu worked as a bike courier before working in the finance sector before quitting the working world to work on his research full time.

The idea is this: Profits from buying and selling stocks come from other investors who are buying and selling stocks. When someone buys low and sells high, another sucker is also buying high and needs to sell for even higher. Companies like Google, Amazon, and Tesla never pay their shareholders. Their investors profits are dependent on the inflow of money from new investors, which by definition, is how a Ponzi scheme works.

There are fundamentally two types of stock:

He compares the creation of stocks to money printing. He calls the stock market Ponzi Scheme “stock printing.” The strategy of printing money is currently being used by many countries to fight the global recession, including the US (it’s not called money printing when you see it though. Stimulus checks, bailouts and the fed buying corporate bond/stocks)

Money printing is creating money out of thin air. It devalues the money that you have in your savings account, making it worth less.

Stock printing is the creation of more stocks out of thin air by a company. Many of the stocks going crazy right now — Facebook, Amazon, Google — don’t pay you any money for owning them.

They create more and more stocks which is fine, assuming that the stock market doesn’t suffer a sudden stroke. When stocks start going down or have a prolonged downturn like they have in Japan for the last 30 years, then shit get real.

In history, Stocks are known as equity and people associate that word with ownership in a company. In reality, Stocks are not real equity ownership devices because there is no legitimate monetary connection between stocks and the companies. A share of Google (GOOG) trades at $1100, but Google states in writing; they don’t pay dividends, there are no voting rights, and the par value of GOOG is only $0.001 per share. So if you own a share of Google, you won’t receive any money, you cant vote, and Google will only pay you $0.001 for that share you bought for $1100. Does that sound like ownership?

Before the 1900s, Tan’s research shows that all stocks paid dividends. “Stocks had a definitive profit-sharing agreement between the shareholders and the companies they owned,” says Tan.

The core idea of his argument is that the creation of stocks was to help investors have a share of the profits through dividends, not to make money off of the stock price in the form of a capital gain.

The reliance on capital gains is what is wrong with stocks, he says, and makes them a Ponzi Scheme.

Whilst I haven’t entirely convinced myself that the stock market is one humongous Ponzi scheme, the idea of stock printing by non-dividend paying companies was a game changer for me.

There’s more, if you want to understand it better: