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I want to figure out what's the difference between buying stocks and entering Ponzi scheme under certain situations. This is more of a theoretical/hypothetical question.

Suppose the company P makes 0 revenue, contributes 0 to the society and there is 0 regulations.

If investor A bought stocks of P, and then sold it at a higher price to investor B. That is, the later comer is paying the earlier comer. Then this is how Ponzi scheme works. Hence, buying stocks of P = entering Ponzi scheme?

Does the reasoning make sense? Do I miss something important?

marked as duplicate by Ben Miller, Chris W. Rea, Nathan L, JoeTaxpayer Nov 1 '16 at 0:32

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    Your reasoning makes no sense to me. Typically the attraction of a Ponzi scheme is profit. What motivates investor B, and subsequent investors, to buy the stock? Why would they pay a higher price? – Pete B. Oct 31 '16 at 20:00
  • @PeteB. Maybe they are very optimistic about IT industry. – John Hass Oct 31 '16 at 20:46
  • If the investor A gave their money to P, got stock, and P reported it on their books as revenue, the example given would be closer to a ponzi scheme. In a normal (non-fraudulent) IPO, A's investment is capital, not revenue. – user662852 Nov 1 '16 at 1:46
  • No, one of the key parts of a Ponzi Scheme is that the mechanics of the business are opaque- the buyer thinks they are guaranteed a high rate of return but it is actually a fraud based on most investors churning their 'profits' back into the company and the few that cash out paid out of investments of other investors. Ponzi schemes usually claim schemes that really can't work, so the books of the business have to remain hidden. – user11599 Nov 1 '16 at 2:16
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That's not how a ponzi scheme works. You've just described a totally benign transaction involving shares of a sham company. Plenty of people traded Enron shares before it collapsed, that doesn't mean they were complicit or involved in a Ponzi scheme or fraud.

Here is the wikipedia page for Ponzi Scheme

A ponzi scheme is when I give funds to Fund Manager A because he has a good history of strong returns. Fund Manager A does something with the money I give him, but his financial statements don't represent his true activity or returns. He maintains his strong returns and Investor B shows up to invest also. At some point I want my money back for whatever reason. Since the returns have all been a sham, I'm paid out with the funds that Investor B sent in based on totally fabricated returns.

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A Ponzi scheme, simply defined, is where the schemer uses funds invested by one person to pay off (or provide a return) for an earlier investor. Such schemes require a continual supply of new investors, and when they run it, the schemes collapse.

Bernie Madoff is the best modern-day example of how a Ponzi scheme works, and he ran his for decades before it finally caved in thanks to the 2008 economic crash. People who had been content to leave their "returns" with Bernie started getting margin calls as the markets imploded, so they asked Bernie for redemptions he didn't have the funds for. That's what caused him to come clean, because there was no way to hide it any longer.

Buying shares in a company with no revenues and then selling them to someone else at a higher price is not a Ponzi scheme. That falls under the "greater fool" theory of economics -- there's always a bigger fool who can be parted from his money.

As was pointed out, Enron is a great example of what you're talking about -- they published totally fabricated financial statements that people then used as the basis to invest, only to learn later that it was all a lie.

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