i was thinking about this and was wondering if you guys had any experience that could lend insight. playing stocks is a zero sum game. but if i buy at 100 and sell at 90 i lose 10. then the next guy has bought at 90 and sells at 80 so he loses 10. but if i short at 100 and cover at 90 i make ten, and so on. what percentage of all this losing, 60%, over the past 16 months is losing and what percent is losing for one but gaining for another?? and if it is all losses, then where does the money go?? a guess this might be an economics question more than a trading question. any help?
Stocks are definately not a zero-sum game. Some do go short and have made money, but for every stock long, there is not a short like a futures contract. Think of buying a stock like buying a coveted baseball card, you go in your attic and find an old babe ruth baseball card from your youth that you paid a dime for and got a stick of bubble gum with. You go out on ebay and sell that for $1,000 now. You have made a handsome profit and nobody was short that card from a dime, thus losing $999.90. The guy that buys that from you thinks the value of that card will be $1,100 in 3 months and looks to sell it up there. Meanwhile the market for that card drops to $750 and he needs the cash, so he sell it. He has lost $250 on his investment, nobody has made $250 from the value of it dropping. Stocks are nothing more than perceived value by buyers and sellers. Some do have the opportunity to short them, but the vast majority of shares outstanding do not have shorts attached to them as well. Futures are zero sum, it is a contract struck between a buyer and seller at that particular price. For you to go long April oil at $45, someone must sell it to you and go short oil at that same price.
Commissions paid to brokers and margin interest is also the leak in this whole game. They make money regardless what market is doing ;-) Cheers,
buy and hold stocks is not zero sum but trading stocks in shorter periords of time is zero sum. so, to answer your question of where the money goes, the vast majority of paper money ceases to exist when a selloff occurs. i.e. in the last months selloff, lots of wealth from the stock market was lost due to losses in the long term portfolios. while short term traders have just transferred gains and losses between each other (some lost, others won), long term holders have all lost much of their portfolio value to no one, as the wealth was destroyed (in fact, it didnt existed in the first place, it was just paper money). even if some of the zero sum sum (short term) traders benefitted from the stock selloff, it was at expense of other short-term traders, as for any profitable short-term transaction in the stock market, has to be an losing offsetting transaction. so while short term trading is about transferring money, long term holding is where the money is created or destroyed. thus, when the market selloffs, the collective wealth plummets, while when goes up the collective wealth increases.
thanks, that make sense, the paper profit is gone, but actual $$$ did not trade hands. and in the case of the baseball cards, the guy who paid me the $1000 is the loser and i am the winner. or if he sold it for $1100 he would be the $100 winner and then the owness is passed along. this is what kills me. today, for instance. it was clear the market was headed down. i was in front of my screen ready to short some downgraded companies and make some dough. i had ANNE TAYLOR (ANN) in mind. it was hanging around at $5. then boom it opens and goes up. blows my mind. my first question is, who is buying?? are these people stupid?? or am i the stupid one and missing something. ANN goes up to $5.25. unreal. i lay down at 9:40 to rest, i am on the west coast, been up since 4:30 (7:30). when i get up and check the market it is down to $4. wow. somebody paid $5.25. WHY???? this company might be going bankrupt. why would anyone buy it? why is anyone buying it at $4. lol. this is the part of the game that i cant figure out. i know it is worth a certain value, and it is worth a certain future value, but just like the baseball card, the demand dictates the price. are all the people buying it speculating that it is going to turn around?? and if so, in this bear market why not let it go to $1. ANN is clearly a less valuable company than Citibank, if C can go to $1, or GM, or GE (not yet) than little ANNE TAYLOR will be there soon enough. i guess this is what makes the market.
The market is 100% about money flow, period. Just like the top all time investors are all sucking wind from large gaping chest wounds, the negative money flow has destroyed their "Value". Company fundamentals do matter, but over a long term, not short term and thus good companies are getting crushed.
In a very broad sense, when asset prices decline, money gains in value. Here is an example: Suppose A has $1000 in 10 x $100 shares and B has $1000 in cash. Suppose that shares decline to $40. A's $600 loss is distributed equally between all cash $$ holders in the economy. In our example, the $600 loss will go to B in its entirety. If before the crash B could buy 10 shares, after the crash, as money has gained in value (at A's expense), B is able to buy 25 shares. Thus B has a profit of 15 shares, which amount to 15 x $40 = exactly $600 which is A's loss! The difference from futures markets is that in the stock market there is not a single person you can always pinpoint which takes exactly your loss. Instead you have to imagine that your loss gets distributed to every person on the planet who has some cash.