The Ponzi Factor - Short Trailer

When we think about the stock market, we think about money, the finance industry, businesses, and making money from investing in successful businesses. The belief is investing in successful businesses is what leads to investment profits, and there's a direct connection between the success of the underlying company and the profits investors experience. This is a reasonable idea, which is why it's in textbooks and recited by finance professionals who sell stocks and stock-related services.

However, this is not how stocks actually work. Most finance professionals have no idea where profits from stocks come from; they just assume it gets magically generated from the complexities of the market. The myth is profits from stocks are generated from the earnings and growth of the underlying companies, and when a company makes money, they share the profits with their investors.

But in practice, most public companies never pay dividends on their stocks, and when they make money—which can be millions or even billions—they keep everything. The reality is profits from stocks come from other investors who are buying and selling stocks. When an investor buys a stock for ten dollars and sells it for eleven dollars, then eleven dollars comes from another investor, someone who will then start hunting for yet another investor who will give him twelve dollars, and so on.

This is technically a negative-sum scenario for investors because they are contributing all the money, and there are fees attached to every transaction. The company that issued the stock isn't involved in these transactions, so whether the business is making or losing money is irrelevant.

This is why companies like Tesla Motors, which has lost billions since they became a public company, can still have stocks that appreciate in value. But in a situation where investors' profits are strictly dependent on money from other investors, investors can make or lose money regardless of whether the company they invested in is making or losing money.

In reality, the stock market is a massive system that shuffles money between investors. It is a system where current investors' profits are directly dependent on the inflow of money from new investors, and such a system is also known as a Ponzi scheme.