Do I make money in the stock market from other people losing money?

Question

Basically I am new to stock trading and neglect to see the differences between trading stocks and betting on sports. Basically I am "betting" on which company will do well, and this can change due to "upsets" just like in sports, but my main question is this:

Is new money actually created in the stock market, or am I just gaining money that someone else has lost?

The answer must be money is being created or "destroyed" because how would the stock market ever be down overall or up overall, but I just can't seem to wrap my head around it.

Like stocks have no inherent value, unlike say something like gold which I could wear as a chain or jewelry. But the only reasons to own a stock that doesn't pay dividends is to sell again at a later point, unless you manage to get 51% of them which I doubt most traders try to do.

So am I missing something or what? Any help would be greatly appreciated thanks!

Answer 1

It's both.

Consider the entire stock market as one giant pool of cash in various bank accounts. Forget the stock 'values'. That's just numbers on a screen. You haven't made money until you have more cash in your account than when you started.

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New cash only ever enters this market one way: Companies pay it in. Either directly, via a dividend. Or by buying (the shares of) another company from their current owners. All that money (eventually) gets funded out of the profits of the companies themselves. That is the source of all gains made by the system as a whole. And it is how almost all investors make almost all of their eventual profits.

Then you have trading. Buying something for one price, and selling it for another. Any money you didn't make from dividends or being acquired, is money that came from somebody else's bank account.

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You'd think this doesn't apply across, say, 10 years. But it does. The way I've found to intuitively understand it is like this:

Imagine you're a high-frequency trading algorithm. You buy and sell millions of stocks every second.

At 12:00 you have £10,000 in your bank account. In the next second, you make a million different trades and 1 second later, after settling out of all those trades, you now have £11,000 in your account.

Where was that extra £1,000 a second ago?

In the collective accounts of every other person who was trading during that time.

It doesn't matter if it's 1 second between trades, or 10 years. New money only ever enters the system from dividends and buyouts, so anything else you made came from other people's accounts. Your gain has to be their loss.

Answer 2

Do I make money in the stock market from other people losing money?

Not normally.*

The stock market as a whole, on average, increases in value over time. So, if we claim that the market is a zero-sum game, and you only make money if other people lose money, that idea is not sustainable. There aren't that many people that would keep investing in something only to continue to lose money to the "winners."

The stock market, and the companies inside it, grow in value as the economy grows. And the economy grows as workers add value with their work.

Here's an analogy: I can buy a tree seed for very little and plant it in the ground. If I do nothing more, it probably won't grow, and it will be worth nothing. However, by taking the time to water it, fertilize it, weed it, prune it, and harvest it, I can sell the produce for much more than I purchased that seed for. No one lost money when I sell it; I increased the value by adding my effort.

If I sell that tree to a sawmill, they can cut the tree into usable lumber, and sell that lumber at a profit. They added their efforts and increased the value. A carpenter can increase the value even further by making something useful (a door, for example). A retail store can make that door more useful by transporting it to a location with a buyer, and a builder can make it even more useful by installing it on a house.

No one lost any money in any of these transactions. They bought something valuable and made it more valuable by adding their effort.

Companies in the stock market grow in value in the same way. A company will grow in value as its employees produce things. An investor provides capital that the company uses to be able to produce things**, and as the company grows, it increases in value. As the population increases and more workers and customers are born, and as more useful things are invented, the economy will continue to grow as a whole.

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_{* Certainly, it is possible, even common, to profit from someone else's loss. People lose money in the stock market all the time. But it doesn't have to be this way. The stock market goes up, on average, over the long term, so long-term investors can continue to make money in the market even without profiting from others' failures.}

_{** An investor that purchases a share from another investor does not directly provide capital to the company. However, this second investor is rewarding the first investor who did provide capital to the company. This is the reason that the first investor purchased in the first place; without the second investor, the first would have had no reason to invest and provide the capital. Relating it to our tree analogy: Did the builder who installed the door help out the tree farmer? After all, the tree farmer already sold the tree to the sawmill and doesn't care what happens to it after that. However, if the builder had not needed a door, the sawmill would have had no reason to buy the tree.}

Answer 3

There's really not a simple yes/no answer. It depends on whether you're doing short term trading or long term investing. In the short term, it's not much different from sports betting (and would be almost an exact match if the bettors also got a percentage of the team's ticket sales),

In the long term, though, your profit mostly comes from the growth of the company. As a company - Apple, say, or Tesla - increases sales of iPhones or electric cars, it either pays out some of the income as dividends, or invests them in growing the company, so it becomes more valuable. If you bought shares cheaply way back when, you profit from this increase when you sell them. The person buying it doesn't lose, as s/he buys at today's market value in anticipation of continued growth. Of course there's a risk that the value will go down in the future instead of up.

Of course, there are also psychological factors, say when people buy Apple or Tesla because they're popular, instead of at a rational valuation. Or when people start panic-selling, as in the '08 crash. So then their loss is your gain - assuming you didn't panic, of course :-)

Answer 4

Because I feel the answers given do not wholely represent the answer you are expecting, I'd like to re-iterate but include more information.

When you own stock in a company, you OWN some of that company. When that company makes profit, you usually receive a dividend of those profits. If you owned 1% of the company stock, you (should) recieve 1% of the profits.

If your company is doing well, someone might ask to buy your stock. The price of that stock is (supposed) to be worth a value representative of the expected yield or how much of a dividend you'd be getting.

The "worth" of that, is what you're betting on when you buy the stock, if you buy $100 worth of coca cola stock and they paid $10 as dividend, you'd be pretty happy with a 10% growth in your wealth. Especially if the banks are only playing 3%.

So maybe some other guy sees your 10% increase and thinks, heck.. 10% is better than 3%, if I buy your stocks, even as much as 6% more than they are worth ($106) I'm still going to be better off by that extra 1% than I would be if I left it in the bank.. so he offers you $106.. and you think.. awesome.. I can sell my $100 of cola shares now, make a $6 profit and buy $100 worth of some other share I think will pay a good dividend.

Then cola publicises their profits, and they only made 2% profit, that guy that bought your shares for $106, only got a dividend of $2 (since their 'worth' is still $100, and effectively he lost $4 as a result.

He bet on a better than 10% profit, and lost out when it didn't hit that.

Now, (IMHO) while the stock market was supposed to be about buying shares, and getting dividends, people (brokers) discovered that you could make far more money buying and selling shares for 'perceived value' rather than waiting for dividends to show actual value, especially if you were not the one doing the buying and selling (and risk), but instead making a 0.4% cut off the difference between each purchase (broker fees).

So, TL;DR, Many people have lost money in the market to those who made money from them. But only the traders and gamblers.

Answer 5

The stock market is no different in this respect to anything that's bought or sold. The price of a stock like many other things reflects what the seller is prepared to sell it at and what the buyer is prepared to offer for it. If those things match then a transaction can take place.

The seller loses money but gains stocks they feel represent equivalent value, the reverse happens for the buyer.

Take buying a house for example, did the buyer lose money when they bought a house, sure they did but they gained a house. The seller gained money but lost a house.

New money is created in the sense that companies can and do make profits, those profits, together with the expected profits from future years increase the value that is put on the company. If we take something simple like a mining company then its value represents a lot of things:

• the mining equipment it owns that in theory could be sold
• the amount of raw materials it could extract in the future less the cost of extraction
• the price of the raw materials, both now and in the future
• how much money it has in the bank (presumably earned through previous mining)
• the value of the land it owns that the mines are situated on

and numerous other lesser things too. The value of shares in the mining company will reflect all of these things. It likely rises and falls in line with the price of the raw materials it mines and those change based on the overall supply and demand for those raw materials.

Stocks do have an inherent value, they are ownership of a part of a company. You own part of the asset value, profits and losses made by that company.

Betting on things is different in that you've no ownership of the thing you bet on, you're only dependent on the outcome of the bet.

Answer 6

Stock is not a zero-sum game!

Just because your slice of pie gets bigger doesn't necessarily mean someone else's becomes smaller. In a lot of cases it's the entire pie that gets bigger.

Why is the pie bigger?

More investors (savers turn investors; foreign investments, etc.), more money printed (QE anyone?), Market sentiment changes (stock is priced by perceptions)

And it can certainly get smaller.

Answer 7

Both—Yes and No

Yes (profit from others' loss)

Day traders see a dip, buy stocks, then sell them 4 mins later when the value climbed to a small peak.

What value is created? Is the company better off from that trade? The stocks were already outside of company hands, so the trade doesn't affect them at all. You've just received money from others for no contribution to society.

No (contributing to the economy)

A common scenario is a younger business having a great idea but not enough capital funds to actually get the business going. So, investors buy shares which they can sell later on at a higher value. The investor gets value from the shares increasing over time, but the business also gets value of receiving money to build the business.

Answer 8

The answer is partly and sometimes, but you cannot know when or how.

Most clearly, you do not take somebody else's money if you buy shares in a start-up company. You are putting your money at risk in exchange for a share in the rewards. Later, if the company thrives, you can sell your shares for whatever somebody else will pay for your current share in the thriving company's earnings. Or, you lose your money, when the company fails. (Much of it has then ended up in the company's employees' pockets, much of the rest with the government as taxes that the company paid).

If the stockmarket did not exist, people would be far less willing to put their money into a new company, because selling shares would be far harder. This in turn would mean that fewer new things were tried out, and less progress would be made. Communists insist that central state planning would make better decisions than random people linked by a market. I suggest that the historical record proves otherwise. Historically, limited liability companies came first, then dividing them up into larger numbers of "bearer" shares, and finally creating markets where such shares were traded.

On the other hand if you trade in the short or medium term, you are betting that your opinion that XYZ shares are undervalued against other investors who think otherwise. But there again, you may be buying from a person who has some other reason for selling. Maybe he just needs some cash for a new car or his child's marriage, and will buy back into XYZ once he has earned some more money. You can't tell who you are buying from, and the seller can only tell if his decision to sell was good with the benefit of a good few years of hindsight.

I bought shares hand over fist immediately after the Brexit vote. I was putting my money where my vote went, and I've now made a decent profit. I don't feel that I harmed the people who sold out in expectation of the UK economy cratering. They got the peace of mind of cash (which they might then reinvest in Euro stocks or gold or whatever). Time will tell whether my selling out of these purchases more recently was a good decision (short term, not my best, but a profit is a profit ...)

I never trade using borrowed money and I'm not sure whether city institutions should be allowed to do so (or more reasonably, to what extent this should be allowed). In a certain size and shortness of holding time, they cease to contribute to an orderly market and become a destabilizing force. This showed up in the financial crisis when certain banks were "too big to fail" and had to be bailed out at the taxpayer's expense. "Heads we win, tails you lose", rather than trading with us small guys as equals! Likewise it's hard to see any justification for high-frequency trading, where stocks are held for mere milliseconds, and the speed of light between the trader's and the market's computers is significant.

Answer 9

Gambling is less than zero-sum. The market is more than zero sum.

In gambling, the house also takes a cut, so the total money in the game is shrinking by 2-10 percent. So if you gain $100, it's because other people lost $105, and you do this for dozens of plays, so it stacks up.

The market owns companies who are trying to create economic value - take nothing and make it something. They usually succeed, and this adds to the total pot and makes all players richer regardless of trades.

Stay in a long time, and nobody loses

Gambling is transactional, there's a "pull" or a "roll" or a "hand", and when it's over you must do new transactions to continue playing. Investing parks your money indefinitely, you can be 30 years in a stock and that's one transaction. And given the long time, virtually all your gains will be new economic value created, at no one else's expense, i.e. Nobody loses.

Now it's possible to trade in and out of stocks very rapidly, causing them to be transactional like gambling: the extreme example is day-trading. When you're not in a stock long enough for the company to create any value (paid in dividends or the market appreciating the value), then yes, for someone to gain, someone else must lose. And the house takes a cut (e.g. Etrade's $10 trading fee in and out). In that case both players are trying to win, and one just had better info on average.

Another case is when the market drops. For instance right after Brexit I dumped half my domestic stocks and bought Euro index funds. I gambled Euro stocks would rebound better than US stocks would continue to perform. Obviously, others were counterbetting that American stocks will still grow more than Euro will rebound. Who won that gamble? Certainly we will all do better long-term, but some of us will do better-er.

And that's what it's all about.

Answer 10

Do I make money in the stock market from other people losing money?

Sometimes.

If the market goes down, and someone sells -- on a panic, perhaps, or nervousness -- at a loss, if you have extra cash then you can buy that stock on the hope/expectation that its value will rise.

Answer 11

There is one other factor that I haven't seen mentioned here. It's easy to assume that if you buy a stock, then someone else (another stock owner) must have sold it to you. This is not true however, because there are people called "market makers" whose basic job is to always be available to buy shares from those who wish to sell, and sell shares to those who wish to buy. They could be selling you shares they just bought from someone else, but they also could simply be issuing shares from the company itself, that have never been bought before.

This is a super oversimplified explanation, but hopefully it illustrates my point.