I have a question which deals with simple logic in the world of stocks and investing.?

Question

When you buy a company's stock, you are buying a fraction of the company.

If a company has 10 million shares

and if the stock price goes up $20 dollars in a given year

then is it logical to say that all the buyers and sellers during that same year, all of their "monetary gains and losses" will add up to $200,000,000.00 ?

Because if it is, then it sorta implies that to make profits in the stock market, you either make an "average profit" and if you do superior, your gains are at the expense of those who do inferior.

I define these in the following inequality

inferior
I ask this because I have studied finance and there are losers who are smart yet not logical enough to see that people who simply "hold stocks" for an entire given year simply shrink the amount of shares available for trading during that same year.

Therefore concluding people who "actively trade" only do so at each other's expense, and their group makes no "magic profit"
Because

Because the quantity of shares if finite.

The quantity of "value" is a FIXED NUMBER for a past year. The Market Value of a firm's equity, goes UP or DOWN in a given YEAR by a FINITE AMOUNT and this amount is measurable, and all the participants in buying or selling the stock, their aggregate transactions equal the increase/decrease in that firms change in MVE

Answer 1

Wheres the question?!

Answer 2

Sharebuilder will let you do it for $4 per trade if you set up a re-invest plan. TradeKing is 4.95 a trade, and also does options. If you may also want to dabble in bonds, Firstrade will let you in on the action, though their stock trades are 6.95. With only $1000 and in this market though, investing in individual stocks might not be the best option, especially if you're just learning. You may want to try ETFs, which trade like stocks but are comprised of multiple assets. That way you're diversified. Right now commodities, bonds (no junk bonds though), government debts (Treasuries and TIPS) are probably safe bets. If you want ot get a little riskier you can try some of the ETFs that short the market. If you have your heart set on stocks though, stick with the larger companies that are likely to whether the storm. Real Estate and financial stocks are like burning money at the moment. But whatever you decide, do your due diligence. Also keep the number of trades low. Even low commissions can eat your return pretty quickly. Also, in this market you should be prepared to lose some or all of your investment. If that money is essential funds, then you'd be much better off socking it away in money market account. ~X~

Answer 3

I am not exactly sure what the question is here. But if I understand it correctly, in this case there was a $200 mil increase in the value of the stock during the year. That is true. But during the year due to the fluctuations in price and the amount of trading that occured in the stock much more might have been made and lost on the stock. Actually, only those who held the stock since the beginning of the year actually made the $20.00/sh. profit. A day trader in the stock might very well have made much much more or lost a significant amount. Then there are those who shorted the stock. If they shorted at the beginning of the year and are still holding their position, they have a paper loss of $20.00 a share. Actually because of short interest the gain could actually be greater than $200 mil for those who are holding the stock. For the shorts, not so.

Answer 4

In your example, the company has created $200MM in new value, i.e the market capitalization of the company has increased that much.

Because the stock probably did not move up in a straight line and there were short sellers in there to muddy the waters there was a lot more activity than just buying and holding it while it went up.

Consider:
(winners total profits) = (value created by increase in company value) + (losers total losses)
[Note: value created may be negative]

Do not assume that long term holders reduce the supply of stock. When some buy for the long term, others die and their estates sell the stock or the long term holder just want his money back for something else.

Answer 5

"Value" is NOT a fixed number. The stock market isn't a "certain amount of money" being shuffled between companies, brand new money is being printed by governments and added all the time. Brand new people are being born. Brand new companies are being formed.

You are also fooling yourself if you think that folks "holding" shares are in some way reducing the available pool of shares; if there is every limited liquidity due to available volume, companies and market-markets simply release more!

Answer 6

You've put a lot of thought into your question, but missed the point of what really drives the market. People and their irrational desires drive the market -> is why sheeple buy high and sell low (i.e., they view short term history as an indicator of future results without doing any real financial analysis).

Greed and fear drive most investment decisions and it is very difficult to rationally model those two.

Answer 7

I strongly suggest you to read more about "Short Sells"