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| Pyramiding |
Pyramiding is the practice of using past successes to create additional value, even if the profits from past successes are not yet realized. In finance, this term has been used to describe the purchase of a security on the margin created by the increased valuation of previous purchases of the security in an investor’s portfolio.
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 througth leverage 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.
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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.
