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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!

Asleepace
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    Stocks represents ownership of a company, that's where money is created and a company (its assets, intellectual property, etc.) is certainly worth something. In principle, on average and in the long term, the stock market should grow at the same rate than the economy as a whole. – Relaxed May 14 '17 at 09:29
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    Reviewers: Although the answers touch on macroeconomics, these concepts are important for stock market investors to understand. This is applicable to personal finance. – Ben Miller May 14 '17 at 12:24
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    Related, Short Selling - You CAN make money by betting on other people losing money... although that can go very... very... wrong – WernerCD May 15 '17 at 01:14
  • At the risk of getting really abstract, money is created and destroyed all the time as part of the larger economy, although I believe a healthy economy creates a bit more money than it destroys, leading to a hopefully mild rate of inflation. – Todd Wilcox May 15 '17 at 01:19
  • Join this site to upvote this, I have same speculation util then. – Aesthetic May 15 '17 at 03:00
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    The short answer is "follow the money". When you win money on a bet, it comes from the loser via the bookie. When you make money by selling a stock for more than you paid for it, the money comes from the buyer. The buyer believes they can make money on the stock; you believe you cannot; one of you will be right. – Eric Lippert May 15 '17 at 15:23
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    Now you raise a very interesting question by wondering whether the stock market creates or destroys money. It does not! Stocks represent the creation of value, and value is not money. Money is a device we invented to facilitate the exchange of things that have value. The question of where money actually comes from is fascinating; see if you can figure it out. (Hint: it is not the mint. The mint sells dollar bills at a profit and sells pennies at a loss.) – Eric Lippert May 15 '17 at 15:26
  • WernerCD, short selling doesn't have anything to do with "betting on other people losing money". When other people are also short selling with you, you're not trading against them. Equally, buying stocks isn't "betting on other people losing money" (by shorting). – misantroop May 15 '17 at 16:11
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    @misantroop: that's right. To clarify: in a short sale you borrow a share, sell it today, buy it back when it is hopefully cheaper, and give the share back (with interest). The lender believes they can make money on the interest, you believe you can make money on timing the fall, the person you sell to believes that the stock will go up, and the person you buy from believes it will go down. Some of those people will be wrong. – Eric Lippert May 15 '17 at 17:15
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    In short: though both the stock market and gambling are about taking a risk and predicting the future, their mechanisms are very different. The financial transaction that more closely resembles betting is insurance. When you buy fire insurance you are making a bet that your house will burn down. When your house burns down, you end up getting money from all the people whose houses did not burn down, via the insurance company. The same way that when your horse comes in, you get the money from the people whose horses did not win, via the bookie. – Eric Lippert May 15 '17 at 17:17
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    In aggregate, 100% of stock market returns are from companies making money and giving that money back to investors. About 2% of that, in aggregate, ends up in the pockets of "traders" (HFT, prop traders, punters etc.) and large chunks get lost to fraud, theft, fees, charges etc. But the original source of the money is 100% from the companies themselves. – Kaz May 16 '17 at 19:32
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    On an indvidual basis, of course, lots of people can lose money, and lots of people can gain money from other people losing money, but all of the growth in total value comes from the companies adding to the pie. – Kaz May 16 '17 at 19:33
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    Fascinating that Is the stock market a zero-sum game? was closed off topic, but this is essentially an identical question. Do I make money in the stock market from other people losing money? The answer can only be yes if it's zero sum. – JTP - Apologise to Monica May 16 '17 at 22:32
  • Sounds more likely that other people are going to make money from you losing it at the moment! – mcfedr May 17 '17 at 12:23
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    No it's not that simple. You also get money when the company share it's profits with the shareholders which usually happens one or a few times per year. So even if the company is sold on an average lower rate some time after the price you paied when you bought it, you can still have made a net plus if you take those profits into account. – mathreadler May 17 '17 at 16:08
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    gold doesn't have inherent value either. where is the value in gold? deep down in the atoms? or is it the shine? from the perspective of a (neoclassical) subjective value theory, something 'has' value, because people value it. people value gold and they value stocks, so there's no fundamental difference in where the value comes from. from a (marxist or ricardian) objective value theory, both gold and stocks have almost no use-value, but they have exchange value; this is because at some time, someone has put in work to create the capital that stocks represent and to extract the gold. – henning May 19 '17 at 07:46
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    Note you can also make a lot of money from Earth losing natural resources. – Eric Duminil May 19 '17 at 12:21
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    @EricLippert "The buyer believes they can make money on the stock; you believe you cannot" That's not really accurate. There are lots of reasons that people sell stock other than that they don't believe they can make money on it. The most common is probably that they want to use the money for something else. Whether that be for an expense, a different investment, a change in their investment strategy (e.g. decreasing risk as approaching retirement,) a desire for better diversification, etc. As with any voluntary exchange, the purchase of stock is a trade that both parties consider beneficial. – reirab May 19 '17 at 16:06
  • @EricLippert And that's without even going into market makers and such. – reirab May 19 '17 at 16:07
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    The usual way to answer one's own question would be to write it as an answer, not as an edit to the question. – Stian Jan 28 '21 at 12:31
  • @StianYttervik these are unusual times. – Asleepace Jan 28 '21 at 12:32
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    The answer is not yes. The current situation is an example of people taking bets on the direction of a particular stock, and is not universally applicable to all stocks. – chepner Jan 28 '21 at 13:01
  • @chepner I’m refraining from taking a side on this, write a better answer and I will give a fair review. The market can’t print money. – Asleepace Jan 28 '21 at 13:02
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    Leave your question as it was: a question. Let the answers provide an answer; you don't need to summarize the provided answers in your question. – chepner Jan 28 '21 at 13:06
  • Nothing about the current situation affects the accepted answer. You can make money by betting against other people; it's not the only way to make money in the stock market. – chepner Jan 28 '21 at 13:07
  • @chepner ok well we need a better answer than “not normally” – Asleepace Jan 28 '21 at 13:09
  • @chepner if no one put more money in the market, no new money would be created. The market does not create new money. – Asleepace Jan 28 '21 at 13:13
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    If no one put more money in the market, no money would be lost, either. The current situation with GME is not "the market". It's a specific situation where a group of people are actively working to artificially inflate the price of a single stock long enough to affect people holding short contracts on that stock. It is not typical of how the stock market as a whole works. – chepner Jan 28 '21 at 13:29
  • @chepner I agree this is a somewhat highly unusual situation, although it’s happened before, I’m a simpleton and I think my question was valid. If our government has the sole authority to print money, where in the is the extra money coming from? – Asleepace Jan 28 '21 at 13:32
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    Don't confuse printing money with creating value. Printing money neither increases nor increases the value of anything. It's printing more or less money than warranted by the value of the economy that affects the value of all money. – chepner Jan 28 '21 at 13:50
  • @chepner I see your point, I’m not trying to be the difficult guy on the Internet either, but that value is directly proportional to the supply of fiat currencies. The market cannot be more valuable in terms on cash than there exists cash on the planet. Sure it may disperse differently, but this is a 0 sum game. – Asleepace Jan 28 '21 at 13:55
  • @chepner for every $1 in there can only be $1 out, or that would fundamentally mean money is based on imagination. – Asleepace Jan 28 '21 at 14:00
  • @Asleepace Reread my answer again. Companies can (and normally do) increase in value through effort, investment, and innovation. – Ben Miller Jan 28 '21 at 16:48
  • @BenMiller-RememberMonica I feel like I shouldn’t be the sole arbiter of choosing the correct answer on this thread, but that to me is just an example of how money seeps into the system. This would partially explain some major brokerages decision to suspend trading, since they couldn’t pay out more money than currently exists. – Asleepace Jan 28 '21 at 22:31
  • @Asleepace No worries, it’s your right as the OP to accept the answer you think best explains things. – Ben Miller Jan 28 '21 at 22:33
  • Profits in the stock market comes from a combination of speculation (zero-sum between speculators, where no productive labour is done) and employment profit (zero-sum between employers and employees, where only the employees need to do productive labour). The employment profit is where dividends come from and why stocks tend to rise in value. Employers pay workers less per hour than what the workers earn in revenue in that time, and workers reliably tend to accept this raw deal because they don't own the means of production (land, machinery, IP etc) their labour relies on. – iono Nov 18 '21 at 11:22
  • @iono thanks for the answer, at this point my outlook on the markets is very nihilistic and bloodthirsty. When you YOLO options the way I do, it’s always someone else on the other end. – Asleepace Nov 19 '21 at 03:19
  • I do not think the stock market is a zero-sum game in the way @Eric-Lippert describes because positions are non-offsetting, i.e., if I buy a stock, it's not from someone who is selling it short and whose losses mirror my gains (or viceversa) Suppose I buy a stock at 10 and sell at 20. My gain of 10 is not a loss of 10 for the buyer. The buyer's win or loss is independent of past stock value, but depends only on its future ones. The algebraic sum of all individual wins and losses from time a to time b, should equal the net influx of money that entered (or exited) the market in that period. – MarcoD Jun 26 '23 at 06:39
  • This appears to me as conceptually different from the options and futures markets that are exact zero sum games. In fact, in either of these markets, there are always two parts to a contract and one's win necessarily equals the other's loss. – MarcoD Jun 26 '23 at 06:44
  • @MarcoD I definitely agree with your interpretation and tbh I've spent quite a bit of time thinking about this question in general and considering the stock market doesn't print money, it means it needs to come from somewhere else, which really can only mean someone else's pocket. – Asleepace Jun 26 '23 at 20:32
  • @Asleepace The point is that the amount of money in the stock market is constantly fluctuating. When I open a position I am injecting cash in the stock market, but when I sell I am taking cash out of it. In the example I made, if I buy at $10 and sell at $20, where is that extra $10 coming from? Obviously from the buyer. However is not money that the buyer lost, but it is new money that the buyer injected in the stock market by converting uninvested cash into stock. At that moment the buyer has incurred zero loss because he has bought something whose market value equals what he paid – MarcoD Jun 27 '23 at 00:21

11 Answers11

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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.

* 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.

mhoran_psprep
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Ben Miller
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    However, trading stock doesn't increase value, so every time you buy stock and then make a profit, you prevent someone else from making profit, and if you buy stock and then make a loss, you help someone else not make a loss. – user253751 May 14 '17 at 22:33
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    It's worth noting that creating value takes a long time. Which means that if you make money in the short term (e.g. by buying and selling stocks all day) then, in the short term, somebody else (or, rather, several somebodies) lost that money. High-frequency-trading, for instance, is absolutely a zero-sum game. – Kaz May 14 '17 at 22:34
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    I would add that the added value is relative. If everybody who owns stocks would decide to sell them right now they would find , with the exception of the few first persons who sell, that their stocks don't have their value anymore. So, in a sense, the value of the market is potential, not real. It is real for as long as the buying and selling is not massive. – Martin Argerami May 15 '17 at 01:46
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    @BenMiller: re your example with the tree. It looks like you created value by planting the tree etc. But suppose I have a tree farm. When your tree is ready, all my trees lost a tiny little bit of value because now there is one more tree, yours. It looks like you created value, and you did in a way, but this was only possible by devaluing s/th else. –  May 15 '17 at 04:32
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    @gojira Supply and demand play into value. But it's also possible that I find a new buyer for my tree that you don't have. In that case, I'm not lowering the value of your trees, because demand increased. And as the economy grows and more houses are built, more wood will be needed. – Ben Miller May 15 '17 at 04:40
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    I'd disagree with the assertion that a zero-sum game is "unsustainable". The derivatives market is zero-sum, and it dwarfs the size of the physical market. – Yosef Weiner May 15 '17 at 05:34
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    @SkinnyJ The way I understand this answer, it's not that a zero-sum game is unsustainable. What is unsustainable is the idea that the stock market is a zero-sum game. That's because "The stock market as a whole, on average, increases in value over time." – Angew is no longer proud of SO May 15 '17 at 07:15
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    The stock market does not create value, the companies do. The stock market increases in value because some of the value created by the companies is invested in stocks. – Stig Hemmer May 15 '17 at 09:59
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    When I say "the stock market increases in value," I mean that the total value of the companies in the market increase in value over time. This is not a guaranteed future outcome, but it is historical fact. The market itself is just a mechanism for buying and selling pieces of companies. – Ben Miller May 15 '17 at 11:25
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    @Kaz: I am not so sure about high-frequency trading being zero-sum. Consider all the individuals engaging in HFT. Most likely, they are (in the aggregate) making money off those buyers which buy stocks but do not engage in HFT. In return, they provide asset liquidity which may enter into the utility function of the buyers. – HRSE May 15 '17 at 14:12
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    @HRSE When I say HFT is a zero-sum game, I don't mean that for one HFT to win, another must lose. Rather, that for a HFT to make money, somebody, somewhere (or several million somebodies) who are also trading in the market at the same time, must have lost (or not gained) said money. Sometimes that is other HFT firms. More often, it is everybody else. – Kaz May 15 '17 at 15:38
  • Also, a company might make less money by selling produce then what costs it has to pay (wages, rent, power), so its value might shrink. – vsz May 15 '17 at 16:54
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    @Kaz OTOH HFT can be said to provide arbitrage and liquidity. So they can be think as a trader who transport the wood from sawmill to carpenter - it doesn't produce value directly but it helps minimizing losses. (Whether HFT do that is longer discussion but it is less clear cut then you make it). – Maja Piechotka May 15 '17 at 18:34
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    @MaciejPiechotka I appreciate the nuance. In the context of "paying for liquidity, order and price discovery", HFT firms might, potentially, be providing a real service commensurate with their gains. But in the context of the question and the OP's likely level of knowledge, "zero-sum game" seemed close enough to get the point across. – Kaz May 15 '17 at 18:45
  • Comments are not for extended discussion; this conversation has been moved to chat and further comments will be deleted agressively. – GS - Apologise to Monica May 16 '17 at 11:31
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    The "Tree" analogy is the best microcosm economy example I've heard in a long time! – Ogre Psalm33 May 17 '17 at 19:40
  • @user20574 Mostly true, except the trade value can increase the value of the stock - like in the Tree analogy, if a particular kind of tree is selling very well, people might want to buy a lot more of that tree, and will be willing to pay more for that tree. Though, in the end, this is still a product of how valuable the tree itself is. – Zibbobz May 17 '17 at 20:24
  • @Zibbobz People might want to buy a tree because other people are buying similar trees...? – user253751 May 18 '17 at 09:54
  • @user20574 One has to account for human behavior. – Zibbobz May 18 '17 at 13:35
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    @MaciejPiechotka This is often the argument for HFT but you might want to read "Flash Boys" and check out the IEX. Essentially Brad Katsuyama was working for a Bank of Canada and whenever he went to buy a stocks, the price of that stock would suddenly jump. He figured out (with help) that the reason was that HFT firms were doing simple arbitrage on the price disparities between exchanges. Basically they are skimming money off of institutional investors. – JimmyJames May 18 '17 at 15:15
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    There aren't that many people that would keep investing in something only to continue to lose money to the "winners." Isn't that essentially how casinos make their money? They win because most of their customers lose, yet customers keep coming back. – Barmar May 18 '17 at 18:36
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    It's worth pointing out that even participating in the stock market allows liquidity for stock owners. For example, I needed money to pay off a student loan this month so I sold some stock. The person who bought my stock made money I would've made had I held on to it, in return for granting me liquidity, which I valued higher than the chance to continue to make money from the stock. All transactions are people trading something they value less for something they value more, but that value is not entirely in monetary terms. – Jason Bray May 18 '17 at 19:07
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    @JasonBray Moreover, different stocks can have different values to different people or organizations. If I am in the aviation business, owning stock in oil companies might be more valuable to me than someone who works at the bank in that when oil prices rise, my aviation tends to have lower profits. – JimmyJames May 18 '17 at 20:51
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    @Barmar In my first investment class my teacher asked the students how much would they pay for a machine capable of printing one dollar every year. Casinos sell fun, not money making machines and their customers understand that. – Eduardo Wada May 19 '17 at 14:50
  • @Kaz Your comment is completely ignoring liquidity and that trades are voluntary exchanges. When someone wants to sell stock, me purchasing it does not "prevent them from making a profit." Instead, me wanting to buy it increases the demand for it, increasing the price for which they're likely to be able to sell it. I'm not 'preventing' them from doing anything other than potentially getting a lower price for selling the stock. If they didn't actually want to sell, there's nothing to stop them from simply not selling. – reirab May 19 '17 at 16:13
  • @Kaz Frankly, that notion doesn't really make any more sense than the notion that me buying an apple from someone prevents them from having an apple. Assuming the exchange was voluntary, then they apparently would rather have the money than the apple and I'd rather have the apple than the money. Buying and selling stock is no different. – reirab May 19 '17 at 16:16
  • The point of ordinary barter (and buying things with money is just a proxy for bartering) is that different people value things differently. If you have more apples than you can possibly eat before they go bad, you trade them for clothing from someone who has more wool than they need, and you both gain from the transaction. On the other hand, when dealing with abstract entities like stocks, it's theoretically possible that everyone would value them all identically, given perfect information (the "efficient market" theory); the only time anyone would sell something is when they need liquidity. – Barmar May 19 '17 at 17:29
  • @reirab I make no moral judgements. I also don't dispute that stock transactions are voluntary and, therefore, probably add value in some way. I'm just making the point that, in relation to the original question "where do my returns come from" - if you hold investments over some time period, almost all the return comes from the investments themselves (Dividends, buy backs etc.). But, if you're just "trading", buying and selling stocks all day. That trading, that is a zero sum game. If I make £100 trading stocks all day, someone, somewhere, has lost £100 doing the same. – Kaz May 20 '17 at 01:19
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    That all of those trades were voluntary doesn't change the nature of the game or the outcome. – Kaz May 20 '17 at 01:19
  • @Kaz "If I make £100 trading stocks all day, someone, somewhere, has lost £100 doing the same." That's the part I was disputing. Assuming your day trading involved buying some shares and then selling them for £100 more later in the day, why do you assume someone else lost £100 rather than that one other party was able to execute a sell order (to you) at a slightly higher price than they'd otherwise have been able to and another third party was able to execute a buy order at a slightly lower price that they'd otherwise have been able to do? – reirab May 20 '17 at 04:19
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    @reirab I'm not arguing that every transaction doesn't make sense for everyone involved at the time. Just making the point that, in aggregate. If I made £100 "trading", then "the market" (that is, everyone else), in aggregate, lost £100 trading with me. That they were happy to do it doesn't change what happened. – Kaz May 20 '17 at 04:56
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    I use it mostly to persuade people "not" to start trading. "Look, it's a zero-sum game. Which means that to make any money, that money is going to have to come directly from "the market", which mostly means institutional entities. With whole floors full of traders and Billion-Dollar software development and HFT algorithms that can trade in nanoseconds. Out-trading the incumbents is really, really, hard. Just stick with investing." – Kaz May 20 '17 at 05:00
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    Because with investing, it's not a zero-sum game. In fact, the total investment returns from dividends, buybacks etc. are so much larger than the industry's trading profits (50-100 times larger) that even though you'll lose some money buying and selling, you'll make far more by holding the investments. – Kaz May 20 '17 at 05:03
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    This is also one of the good reasons why you shouldn't buy and sell very often. – Kaz May 20 '17 at 05:03
  • @Kaz that is true, except during times of speculative asset-price inflation. – henning Jun 25 '17 at 13:35
  • That tree analogy was EXTREMELY helpful – Byte11 Apr 30 '18 at 02:43
  • Unfortunately this answer is no longer valid - at this point in time it has become very clear the answer is overwhelmingly yes. – Asleepace Jan 28 '21 at 11:50
  • @Asleepace You are welcome to post your own answer to the question, and you can even accept your own answer, if you like. – Ben Miller Jan 28 '21 at 16:04
  • not sure if anyone has mentioned it yet, but technically if someone sells an asset to a buyer and the buyer gets substantive returns thereafter, the seller has effectively lost out on capital gains that he/she would've otherwise experienced. the seller may have diverted their proceeds to something else resulting in an even greater return. both involved may be satisfied with their returns. this does not necessarily describe a zero-sum game, but rather depicts the concept of opportunity costs. – FluffyFlareon Jun 13 '21 at 19:21
  • @FluffyFlareon I don’t agree. If I decide to sell a stock, my gain/loss is determined by my own purchase price and my sale price. Any future moves after that (up or down) are not mine. I traded my assets for cash and can do anything I want with that: buy another investment, purchase food, travel, give it away, etc. With your logic, you could say that you have lost money any time any stock goes up that you don’t own, since you could have bought it right before it went up, but you didn’t. – Ben Miller Jun 14 '21 at 02:32
  • "with your logic, you could say" stop. stop with the pseudointellectual phrases. I never said you've "lost money"; those are your words. I said you've forgone an OPPORTUNITY (such as the possibility of capital gains) in exchange for another one, because market participants do not have access to unlimited deployable resources. every time you make a decision to own shareholder stake in one asset over another, you've renounced its returns. you have an opportunity cost in liquidating your equity and deploying it somewhere else vs not. this is foundational corporate finance and microeconomics. – FluffyFlareon Jun 14 '21 at 10:06
  • @FluffyFlareon I apologize. My comment came across as harsh. But every person with money has an opportunity to buy any stock he wants. Looking back at what a particular stock that you don’t own has just done (even a stock that you previously owned), and then calling that “opportunity cost” or “lost capital gains” is not useful. – Ben Miller Jun 14 '21 at 10:15
  • The reason stocks tend to grow in time is because surplus labour value is being taken from workers. Yes, the money is coming from someone else. – iono Nov 18 '21 at 11:27
  • @iono The labor value is not being “taken” from the workers, it is being freely sold by the workers in exchange for pay. – Ben Miller Nov 18 '21 at 11:30
  • @BenMiller-RememberMonica ideologically frame it however you want. The source of profits is paying employees less than what they produce per hour in revenue. Businesses aren't printing money, so where else does passive income come from? – iono Nov 18 '21 at 11:37
  • @iono I agree that businesses see the value they get from the labor as worth more than the payroll they pay; if they didn’t, they wouldn’t be making that trade. The workers, on the other hand, who have an abundance of time and a need of money, value the time/labor as worth less than the pay; if they didn’t, they wouldn’t take the job. – Ben Miller Nov 18 '21 at 11:41
  • @BenMiller-RememberMonica I don't know why you're going to such lengths to ideologically justify what's happening when you agree that workers are paid less than their what their labour is worth, and that that is the source of employment profits. Workers take the best deal available to them. If I put a gun to somebody's head and ask for their wallet, that person's still going to choose the best deal for them and give me their wallet instead of dying. Agreement isn't consent. – iono Nov 18 '21 at 11:47
  • @iono Take a look at the tree analogy in my answer again.The employer is providing a service, both to the worker and to the end customer. The employer is like one of the people in the middle of the tree analogy chain, purchasing something of value from the workers (labor) and making it more valuable by adding it to the efforts of their other employees, adding in the value of their assets, finding customers, etc. The worker could possibly sell their labor directly to an end customer and make more money, but it would involve much more effort, investment, and teamwork than just the worker alone. – Ben Miller Nov 18 '21 at 11:56
  • @BenMiller-RememberMonica I really don't care about your ideological justifications. You agree that workers create value with their labour, their boss sells it for less than the wage, and the boss pockets the difference. Employers don't magically add exchange value to the product just by virtue of being rich, otherwise everyone would do that infinitely and inflation would make all currency worthless. Please stop tagging me with propaganda; I don't care. – iono Nov 18 '21 at 12:00
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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 :-)

jamesqf
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    Of course even in the long-term investing example, the growth of these successful companies causes other companies to lose customers and their stocks go down, and the people holding stocks of declining companies will lose money while the people holding stocks of the advancing company make money. You won't be making money from the people you buy the stocks from or eventually sell the stocks to, but somewhere out in the market someone else is losing while you are gaining. – martin May 17 '17 at 05:49
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    @martin That's only true if there's a fixed-size market, so one company's gains have to come at a competitor's expense. But in many industries, the size of the pie grows. Apple didn't lose iPhone sales when Android phones came on the market, there are plenty of customers for both. – Barmar May 18 '17 at 18:39
  • @Barmar Nokia certainly lost a lot of customers when smart phones came out, and their stock declined. And sure, the size of the market as a whole increases, but that's due to an increase in the money supply, which isn't tied to the creation of wealth in any way. link – martin May 19 '17 at 02:33
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    @martin That's different. They didn't lose customers to a competitor in the same market, their market just went away because customers wanted something different that someone else was providing. Like horse sellers lost lots of business when cars came into existence. But Nokia then started making smartphones. – Barmar May 19 '17 at 02:39
  • But now I see that you weren't really talking about direct competitors taking market share from each other. So in that sense, your first comment was apropos. – Barmar May 19 '17 at 02:41
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    @martin "And sure, the size of the market as a whole increases, but that's due to an increase in the money supply, which isn't tied to the creation of wealth in any way." What? No. As people develop new knowledge and become more productive, not only is new wealth created, but it's created even faster than it was in the past. Even after adjusting for inflation, the DJIA is currently valued at 5x what it was in late 1987, for example. Money supply can affect short-term growth rates by making capital more or less accessible, but that's tangent to the fact that new wealth is being created. – reirab May 19 '17 at 16:34
  • @Barmar: Maybe horse sellers lost some business to cars, but the US horse-related industry is still a $100 billion/year market. Arguably even contributing to the auto market, as I know a number of people who've bought pickups simply because they needed something to pull the horse trailer :-) So it's not a case of win = lose, but of a larger pie. – jamesqf May 19 '17 at 18:15
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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.

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.

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.

Kaz
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    I understand what you are saying about new money only entering the system from investors. However, that does not necessarily equate to your point about all gains coming from others’ losses. The companies in the market can increase in value, justifying the larger price. If I buy a stock at a fair value, and then the company grows in value due to the effort and innovation of its employees, and then I sell it at a profit, it does not necessarily mean that the next guy paid too much. – Ben Miller Jan 29 '21 at 02:16
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    In your example, yes, it is hard to argue that in one second the inherent value of his stocks went up 10%. However, in 10 years certainly the inherent value of the companies will be different than they are today, justifying a different fair price. – Ben Miller Jan 29 '21 at 02:20
  • @BenMiller-RememberMonica Irrelevant. Until the company issues a dividend, the money you make still comes from the bank accounts of other participants. Actually if the fair value goes up it is likely that your account is losing money to pay them. You are expecting a dividend in the future, so this feels okay to you. – user253751 Feb 01 '23 at 17:42
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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.

BaneStar007
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    Dividends are only one way to get increased value from owning a stake in a company, but are definitely not the only one and not always even necessarily the best one. If a company reinvests its profits in growing the business instead of distributing them to shareholders, that doesn't mean the value of the business hasn't grown as much. Many quite valuable businesses don't pay dividends at all because they believe they can create more value for the shareholders by reinvesting the money instead of distributing it now. The stock price will reflect that. – reirab May 19 '17 at 16:39
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    @reirab Because the gambling of buying and selling shares is a prevalent aspect of the market, then reinvesting to create more value is a viable workaround, but does not add wealth to the investors, only inflates the asset worth IF it is sold for that value. which means someone else is paying their hard earned money for an asset that might not BE worth it(hence why I use the word gamble) I include my (bracketed) opinions, based on research into why and how the stock market was created in mercantile tiles, and how its been abused in modern times, profit for profits sake. – BaneStar007 May 24 '17 at 00:39
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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.

Robert Longson
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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.

xiaomy
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  • The first section is right, but your "why is the pie bigger" neglects to mention the most important reason why the pie is bigger: the economy is growing as new wealth is created. As the businesses whose stock is being traded create new wealth, the value of the companies increases. And, yes, the pie can indeed get smaller, but, when discussing the economy as a whole, this is almost always a short-term thing. Long-term, as people find new ways to become more productive, the economy (and, thus, its market value) grows (including after adjustment for the inflationary factors you mentioned.) – reirab May 19 '17 at 16:46
  • @reirab I agree that I left that out, somewhat intentionally, as I have always been cynical about how much the growth of market really comes from real economy. I just can't see market going up two digits all the time when GDP growth is that low. – xiaomy May 19 '17 at 16:58
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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.

Community
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Mirror318
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    How does Person A buying stock in Acme Corp from Person B help Acme Corp produce Acmes? After all, Acme Corp isn't involved in the exchange any more than the chocolate bar is involved in my purchase of a chocolate bar at the grocery store. – user May 15 '17 at 13:19
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    Actually the day traders provide some value: they stabilize the stock value by acting as a buffer to larger sales/buys from long term investors. – Paŭlo Ebermann May 15 '17 at 19:35
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    @MichaelKjörling The chocolate bar isn't involved, but the company that made the chocolate bar definitely profits from shops selling (and therefore buying) their goods. If however, that chocolate bar continued to be sold from person to person 20 times, that no longer profits the manufacturer. – Mirror318 May 15 '17 at 22:30
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    Suppose the chocolate bar originally sold for $1 and the 20th person pays $10 for it a year later, the manufacturer might realize they could make some cash by selling more bars at the new $10 price. – bstpierre May 16 '17 at 00:26
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    @MichaelKjörling: by not asking Acme to pay out their share and thus drawing liquidity. Investor B wants to sell their share in Acme for cash. They could sell to someone else (A) - which is what the stock exchange is for: it is a market place for shares in companies which makes it easier to find a buyer A. Or B could sell to Acme itself. If Acme is not traded on the stock exchange, it is difficult to find another buyer A. So cautious investor B would have made sure they have an option to get out of the investment and can demand being payed out. And that is a risk for Acme's liquidity... – cbeleites unhappy with SX May 17 '17 at 08:58
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    ... which the stock exchange avoids if B agrees that the stock exchange provides a reasonable way out and that trading volume for Acme shares is sufficient for their needs. – cbeleites unhappy with SX May 17 '17 at 09:01
  • What I find disturbing about the first comment above is a fundamental lack of understanding of the Acme Corporation. They don’t produce ’acmes’, they produce inferior explosives enthusiastically procured by Wile E Coyote. – JTP - Apologise to Monica Jun 10 '21 at 01:15
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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.

nigel222
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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.

Harper - Reinstate Monica
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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.

Brythan
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RonJohn
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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.

JVC
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  • The "market maker" doesn't necessarily have to be the buyer or seller of last resort. The basic job of the market maker is to bring buyers and sellers together. In the NYSE, if you were to put in a bid (buy order) for a stock that absolutely nobody wanted to sell, the NYSE itself won't sell you any. The markets work the way they do because there's always a price at which someone will buy and someone will sell. The market maker creates the environment in which that price can be found and the trade can happen. – KeithS May 17 '17 at 16:15
  • Absolutely correct, I did say it was an extremely oversimplified explanation. My main point was that trades do not solely consist of individual stock holders selling to buyers. – JVC May 17 '17 at 16:44