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"One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not." So when you make money in the stock market, where does the

by bsd44 5y ago

"One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not." So when you make money in the stock market, where does the money come from?

jfengel 5y ago
From the company's profits. When you buy a company, you own a piece of it. The price of a stock theoretically reflects how much profit you expect the company to earn. In a simple scenario, the company keeps all of its profits in a bank somewhere. The company's value then goes up because you own a share of that money. You'd expect the price to go up to reflect that increased value. You would sell it at a higher price, and it would be a positive-sum game. In reality it's more complicated. Most companies would re-invest that money so that they'll make even more money in the future. The stock price will reflect how well you expect the company to grow and earn more. It's still a positive-sum game, just with more uncertainty. It's even more complicated than that, for a lot of reasons. But at the core, it's a positive-sum game, not a zero-sum game. (At least until the point where people are throwing so much money at the stock market that the prices have nothing to do with a reasonable assessment of uncertainty. And there's a decent chance that this is true today. But long term, such irrational exuberance tends to crash, and over enough time the two mostly cancel out.)
- deleted 5y ago
  [deleted]
- bsd44 5y ago
  Yes you are right, I confused shares with other financial instruments.
bern4444 5y ago
The same place that money goes when you lose money in the market :) [0] More seriously I think the key lots of people miss is that when you buy shares of a company, you don't have dollars anymore. You have shares. Shares are a currency controlled by the company that can issue them (just as the govt can issue dollars). Shares are assets just like a dollar. Also like a dollar, those assets can appreciate or depreciate in value over time. As the company does well, more people will want to invest. People want to invest in a successful company since it means the company will have more profits to give out and more money to continue growing and succeeding to eventually distribute. Most of the time companies go down this second path. As more people invest, fewer shares are available. Demand has gone up, and supply has gone down. Each share is now worth more. But you still have the same number of shares. The reverse is equally true. If a public company does poorly, people will begin to sell. As people sell, demand goes down, supply goes up. Each share is worth less than what it was. But you still have the same number of shares. Their purchasing power has just decreased just as the dollar's purchasing power decreases with inflation. [0]https://www.youtube.com/watch?v=NmFo-LKHGY0 https://www.youtube.com/watch?v=NmFo-LKHGY0 - poof its gone.
- bsd44 5y ago
  You are correct, thanks for replying.

by bsd44 5y ago

"One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not." So when you make money in the stock market, where does the money come from?

jfengel 5y ago

From the company's profits. When you buy a company, you own a piece of it. The price of a stock theoretically reflects how much profit you expect the company to earn. In a simple scenario, the company keeps all of its profits in a bank somewhere. The company's value then goes up because you own a share of that money. You'd expect the price to go up to reflect that increased value. You would sell it at a higher price, and it would be a positive-sum game. In reality it's more complicated. Most companies would re-invest that money so that they'll make even more money in the future. The stock price will reflect how well you expect the company to grow and earn more. It's still a positive-sum game, just with more uncertainty. It's even more complicated than that, for a lot of reasons. But at the core, it's a positive-sum game, not a zero-sum game. (At least until the point where people are throwing so much money at the stock market that the prices have nothing to do with a reasonable assessment of uncertainty. And there's a decent chance that this is true today. But long term, such irrational exuberance tends to crash, and over enough time the two mostly cancel out.)

deleted 5y ago
[deleted]
bsd44 5y ago
Yes you are right, I confused shares with other financial instruments.

bern4444 5y ago

The same place that money goes when you lose money in the market :) [0] More seriously I think the key lots of people miss is that when you buy shares of a company, you don't have dollars anymore. You have shares. Shares are a currency controlled by the company that can issue them (just as the govt can issue dollars). Shares are assets just like a dollar. Also like a dollar, those assets can appreciate or depreciate in value over time. As the company does well, more people will want to invest. People want to invest in a successful company since it means the company will have more profits to give out and more money to continue growing and succeeding to eventually distribute. Most of the time companies go down this second path. As more people invest, fewer shares are available. Demand has gone up, and supply has gone down. Each share is now worth more. But you still have the same number of shares. The reverse is equally true. If a public company does poorly, people will begin to sell. As people sell, demand goes down, supply goes up. Each share is worth less than what it was. But you still have the same number of shares. Their purchasing power has just decreased just as the dollar's purchasing power decreases with inflation. [0]https://www.youtube.com/watch?v=NmFo-LKHGY0 https://www.youtube.com/watch?v=NmFo-LKHGY0 - poof its gone.

bsd44 5y ago
You are correct, thanks for replying.