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Any time a stock transaction takes place, one party believed it was a good idea to sell and the other party believed it was a good idee to buy. This is not ent
by bd_at_rivenhill 17y ago
Any time a stock transaction takes place, one party believed it was a good idea to sell and the other party believed it was a good idee to buy.
This is not entirely true, and I can think of two counterexamples immediately:
1. A long-term stock investor who is at or near retirement will tend to want to convert stock holdings to bond holdings in order to reduce the volatility of the portfolio and start to receive cash income to meet daily needs regardless of his/her opinion of the quality of the stocks.
2. An index mutual fund will sell/buy stock shares in response to investor redemptions/purchases of fund shares without regard to the quality of the shares or the state of the market because the fund is in the business of matching its benchmark and not trying to pick the best stocks.
The market is not always a zero-sum game because participants have different goals and time horizons. There are even more examples than this in the derivatives markets.
- grandalf 17y agoYou're right but it doesn't mean that it's not a zero sum game. When you buy a stock you do not assume it has perfect liquidity (if you wanted that you'd invest in a more liquid investment). So you trade liquidity for growth. Liquidity correlates strongly with volatility. If (as you approach retirement) you decide to trade growth for liquidity and convert to cash, you may end up penalized if the volatility of the stock reduces your return (if you have to sell in a dip). This is part of the trade off that you entered into and you are not penalized as long as you can afford to wait out whatever volatile price movements make the conversion temporarily disadvantageous. As for your point 2, while this is true for an individual trade it's the sort of thing that averages out over time...