Why Isn't the Stock Market Considered a Pyramid Scheme?
The stock market is a large financial entity integrated with many components of the economy. It serves many functions. The stock market allows companies to seek significant capitalization from the public, while in turn providing an opportunity for the public to speculate and profit from a company's success. Pyramid schemes are also used to generate profit for their members. On the surface, there may be some similarities between the stock market and a pyramid scheme, but a deeper knowledge of the two clarifies that these are not at all the same thing.
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Member Limits
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When a company goes public, it makes an initial public offering of a set quantity of shares that act as partial ownership in the corporation. At any one time, the total number of shareholders remains the same. Shares may change hands, but the outstanding quantity of shares is unchanged. This considerably differs with the main flaw of a pyramid scheme. These schemes seek to recruit members who in turn recruit more members. The process can continue indefinitely. The inherent structure behind a pyramid schemes allows for an exponentially greater influx of members at each level. If continued, the scheme's structure theoretically involves more people than the actual world population. This creates a limitless membership, which is ultimately impossible. This is part of the fraud that characterizes a pyramid scheme.
Life Cycle
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A company can exist indefinitely and theoretically forever. The stock market provides a cycle of investment and rewards between the company and its shareholder public. There is no definite end to the cycle on the horizon, unless unforeseen circumstances occur, such as corporate bankruptcy. A pyramid scheme, by contrast, cannot continue forever. Because its structure depends on an increasingly large new membership at each level, it will eventually run out of participants. This makes a pyramid scheme an "unsustainable" business model that has a clear and inevitable end.
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Legality
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The stock market is a government regulated entity with a considerable set of laws governing corporate offerings and shareholder practices. Every step of the process and level of involvement in the stock market, from the distribution of shares by a company to the re-selling of shares by its investors is managed by strict laws. A pyramid scheme, on the other hand, is an entirely illegal phenomenon. There are no management standards because the model itself is considered fraudulent and illegal. This is the most significant distinction between a stock market and pyramid scheme. While both can result in profits for their members, a pyramid scheme will inevitably result in losses by its final participants before it can no longer sustain itself, and this is why it is illegal.
Member Requirements
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Once an investor buys shares in a company, nothing further is required of that individual. They may choose to actively participate in shareholder ballots and attempt to change the direction of the company if desired, but they do not need to participate in this way in order to generate profit. They may sell at any time of their choosing and make a profit for zero work. A pyramid scheme, on the other hand, requires its members to recruit new members in order to generate profit. You cannot join a pyramid scheme and make money without further encouraging others to do the same. They, in turn, must also recruit new members if they are to receive any profits.
Retail Success
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The corporations that trade publicly on the stock market have independent earnings separate from any activity that takes place on the stock market. A retailer may be funded through stock market capitalization, but it uses these funds to improve its business and offer products or services to the public at large. Its corporate earnings are based on this success, which in turn affects the company's share price. A pyramid scheme rarely has any success independent of its members. There is no actual interaction with public non-members. Those who profit do so based on the actions of members on lower levels of the scheme. A "product" may be involved, but it is only sold to other members as they build their required inventories. These products may actually have little success in selling to the public at large.
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References
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