Pyramid trading is one of those phrases which can be judged in a number of ways depending on the circumstances. One must appreciate the fact that pyramid trading techniques applied in the stock market business should not be confused with pyramid scams since they are entirely different.
1. Pyramiding Investment Strategy
Pyramiding in investments is in the main, a stock market trading technique. It refers to the practice whereby one is able to utilize attainable profits as a way of trading in more stocks or other securities. This strategy is legal and can really help the experienced traders get the most out of their investments In other words,.
Here’s how it works:
Initial Position: An investor purchases a fixed lots within a particular stock or agree to undertake a particular quantity of a particular commodity.
Profit Realization: Each holder of the asset has his position which gains value as the price tag of the asset goes up.
Using Profits for Further Investment: This is in contrast to realizing the gains physically whereby the investor will cash in the gain in order to make a profit and instead the investor will use the unrealised gains to buy an even larger position in the actual shares or contracts.
This method is legal because it involves the real business pursuits based on legal properties. But it comes with a lot of risks involved, Not without cause though. Market risk In this case, the investor loses money and it can actually increase rapidly whereby the investor may lose all the money he had invested and more. This is why pyramiding is advised for the advanced investor that has a high risk tolerance level for the investments he / she is making.
2. Pyramid Trading Strategy: A two sided sharp weapon
However, like any(other) investment technique, the pyramiding strategy tends to boost profit, but it also boosts losses. This is so since it depends on endless chain of favourable price movements. For instance, if a trader buys 100 shares and the share price increases they are likely to buy another 50 shares. If the price further increases they may decide to buy 75 more. But if the price starts falling, at this point the trader has a much large exposure and the loss can lead to complete wipe out of the account.
Of course, pyramiding has risk implications which have to managed such as setting stop loss and getting ready to book out in case the trends in the market start to reverse. It is permitted in the financial markets and a popular one at that; nevertheless, it should be applied prudently since it does entail certain frailties.
3. Pyramiding Scheme: This was an Illegal Counterpart to it; There is no place for an Improper Complement.
For more details visit here – What is the Upper and Lower Circuit in Shares?
While pyramiding in trading is not legal but a different type of fraudulent investment model called pyramiding scheme is legal though sometimes confused with pyramiding scheme or a ponzi scheme. In a pyramiding scheme, the money of new investors is employed to pay previous investors the promised returns and not through proper business or investment.
These schemes depend on the enrollment of new recruits in order to continue its operation. Thus, individuals to participate more to get back their money and earn more than they invested in the network. They firmly load up the scheme when there are insufficient numbers of new entrants who place their money into the system and the rest of the players are left worse for wear.
Characteristics of a Pyramiding Scheme:
Recruitment Focus: Instead of making sales of a genuine product or service, it focuses on addition of people into its system so as to make revenues and profits.
Unsustainable Model: That is very unhealthy in the long-run since it has to be fed more and more new entrants or else it crashes.
Promised High Returns: Quite often it promises high and guaranteed returns with little or no risks.
These schemes are unlawful in plenty nations including the USA due to statutes against dishonest business and unreported securities. The promoters of such schemes stand to suffer legal repercussions and get fines and imprisonment.
4. Pyramiding Stocks: Evaluating for Profit or Loss Making
Read more – Understanding the Basics of the Share Market: A Beginner’s Guide
Pyramiding of stocks can be best described as a sub category of pyramiding investment which concerns trading in stock. Here, the investors apply the margin in there account files which is borrowed money from their brokerage with an intention of expanding their stake as their stock prices go up.
How It Works:
- An investor purchases the shares with his/her own money and also via the margin.
- In this case they gain more account equity as the stock price goes up.
- This extra equity the investor employs to purchase additional shares to amplifies his exposure to the stocks.
- It can greatly magnify profits in a rising market and this is great danger when the same market is on the downside. Brokers time limit the amount of margin that an investor is allowed to have in order to avoid loss from high risks.
5. Legal & Regulatory Compliance
Pyramiding in trading stocks is legal as long as it is in compliance with rules that are put in place through the help of regulatory agencies such as the SEC in United States and other international organizations. It is necessary to follow rules concerning margins as well as avoid any manipulations which can be considered as fraudulent.
On the other hand, engaging in pyramiding or soliciting other people to join a pyramiding scheme is unlawful. In such cases, regulatory authorities such as the SEC go after the scams and close them down for legal prosecution. Hence, there is the need to differentiate between legal pyramiding trading strategies and the unlawful ones mainly to avoid getting into trouble with the law and also to prevent accepting high risks.
Read more – Unveiling Hard Truths: Navigating the Realities of Indian Stock Market Trading
Conclusion
I will therefore conclude that pyramid trading is legal depending on the circumstances. Pyramiding in trading especially in stock markets is legal and is commonly used but it bears a lot of risks. It involves significant knowledge of the market, proper entrance of the risks involved and abidance to the trading laws. On the other hand, pyramid schemes are unlawful scams which attract heavy penalties for all the participants involved. It is important for investors and traders where they engage in these practices to do it in the right manner so that they do not fall foul of the law.
