This method to expand an investor’s position in a security through unrealized gains has diminishing effectiveness because margin rules allow only a fraction of the increases to be used to purchase additional amounts of the security.
This term can more generally be applied to other business practices that allow for expansion througthleverage of existing holdings. Pyramiding is typically used in a negative context because, if unconstrained, can result in a multiplier effect of paper purchases with little underlying value.
For instance, in a ‘pyramid scheme’, the investment of late arrivers provide returns for those that subscribed earlier. Such ventures always require new capital to keep the enterprise viable.
Little or no true value is created in such schemes, which invariably end in financial ruin. Margin rules restraining the level of extension of capital based on past paper gains are an effective way to reduce the multiplier effect that pyramiding relies upon.