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This question already has an answer here:

This is probably a typical beginner question.

Imagine I buy today a stock for 10$. The market gods are good to me and one day later it has a value of 100$, at which point I sell it and cash out.

Are those 90$ profit I made free money? Where do they come from?

marked as duplicate by MD-Tech, Grade 'Eh' Bacon, NL - Apologize to Monica, Dheer, BobbyScon Dec 11 '17 at 16:59

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    Do you want to understand where the literal cash came from at the time you sold it, or the mechanisms by which the value of the stock changed and how that was "produced"? – Nathan Cooper Dec 11 '17 at 15:59
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    The same place the money for anything comes from. Say you pay $10 for a bushel of seed potatos, the weather gods are good to you, and you harvest potatos and sell them for $100. The money comes from people who wanted the potatos more than the money. – jamesqf Dec 11 '17 at 18:59
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Are those 90$ profit I made free money?

Yes, other than potential taxes of course :)

Where do they come from?

You paid $10 to one investor when you buy the stock and received $100 from another when you sold it. No money was "created", only exchanged. Whether they make a profit or not depends on what they bought/sold the stock for.

Note that the exchange only facilitates these transactions. You are always dealing with another investor on the other end - the exchange just acts as a mediator so you don't need to deal with the other side directly.

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D Stanley makes a good point;

The reason the stock market is so volatile is that the 'value' is made-up, more or less, at any given point in time by how much any one person is willing to pay for a share of a given stock or fund.

As an example, if you bought an apple for $1, and then sold it to someone else for $2, the $1 in profit didn't appear out of thin air, the product (The apple in this case) was just worth more ($2) to the other person when you sold it to them than it was worth to you ($1) when you bought it.

Stocks can appreciate in value, if people think they're worth more, just like a home can appreciate in value. If you buy a home for $100,000 and later sell it to someone else for $500,000; the person you've sold it to hasn't necessarily lost $400,000, as long as the home is actually worth that amount on the current market and people are willing to pay that amount for that product.

  • This is an excellent point. The stock market is NOT a zero-sum game. Wealth is constantly being created from the intrinsic value of the underlying company. Stock Options, on the other hand, are indeed a zero-sum game and if you make $100 trading options it's because someone else lost $100. – Rocky Dec 11 '17 at 20:23
  • The stock market is indeed a zero-sum game (just like options, futures, currencies, etc.) The difference is that, for some reason, people assume that stocks will always go up over any 20-year period. – Raphael Rafatpanah Jan 4 '18 at 19:06
  • @RaphaelRafatpanah You're either incorrect or you're interpreting the phrase 'Zero-sum game' differently than the rest of us – schizoid04 Jan 5 '18 at 17:55

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