The Stock Market Needs (losers) You

Making a living in the stock market

Photo by Dmitry Ulitin on Unsplash

This is the fifth article of a series. The previous article is “Pretend You Own a Shoe Store”.

Commercial trading

the practice

1. You enter Joe’s shop and pay him $2 for a lollipop.
2. You leave the shop.
3. Joe calls the factory and buys a lollipop for $1, replacing the one he sold to you. Good trade!

the theory

1. The system demands to be fed with money.
2. You feed the system with money.
3. The system feeds you with lollipop.
4. Joe is happy. You are happy.

Stock exchange trading

the practice

1. You enter the stock market and pay $2 for some stock.
2. You don’t know who is the seller. I know. It is Joe.
3. Joe needs to replace the stock he sold. He wants to pay $1, like the lollipop trading.
4. But the price is $2. The best buyer is offering $1.99. The best seller is asking $2.01.
5. Joe waits the next crisis to buy the stock for $1.
6. Six months later the next crisis is happening. You are desperate because the price of the stock came from $2.23 to $1 in only 45 days.
7. You sell the stock for $1, because you don’t stand more pain.
8. The buyer is Joe. You don’t know this.
9. On the next day the price of the stock falls to $0.85. You breathe in relief. “Thanks God! I did the right thing!”.
10. Joe is buying more.
11. Six months later Joe sells everything for $3.15.

the theory

1. The system demands to be fed with money.
2. You feed the system with money.
3. This time there is no lollipop for you.
4. Joe is happy. You are unhappy.

The system — the jungle

It is not personal. Joe had no idea that you were his counterpart.

It is the system.

The profit (for non brokers) in the stock market has three sources:

1. Dividends from profitable companies.
2. Appreciation of the stocks.
3. Stock trading.

Appreciation of the stocks and stock trading are very similar because you don’t make money from an appreciated stock if you don’t sell it. And you buy before sell.Thus, profit from appreciation of stocks can be considered as profit from long term trading.

Following the logic above, we can consider profit from dividend as profit from long term trading. But we will keep the profit from dividend different from profit from trading, because putting both in the same bag is debatable and is not necessary to express my point of view.

Dividends yield, say, 3% per year. The oscillation of the prices can give you this in hours (or less).

The trading of stocks (short or long term) is far more lucrative than the dividends.

When you have profit, the money goes to your pocket.

When the profit comes from dividends, the money that enters your pocket is the money that leaves the vaults of the companies. It is the money that they received for providing something useful to the society, like lollipops.

When the profit comes from trading, the money that enters your pocket is the money that leaves the pocket of other investor or trader.

Trading stocks is a zero-sum game. You only win when other loses.

When there are no goods (products or services) being created, if someone becomes more wealthy, another person must become less wealthy.

It is not the greed. It is the math.

You may argue that everybody wins when Joe buys a stock for $1, sells it to Douglas for $2, who sells it to Mary for $3 .

I would reply that it is a Ponzi scheme! The last one to buy pays the bill (loses everything, or almost).

Examining step by step, considering the VALUE(*) of the stock is $2.

(*) How Many Golden Eggs Would You Pay for the Golden Goose?

1. The guy that sold the stock for $1 to Joe had an implicit loss of $1.
2. Joe had a profit of $1.
3. Douglas had a profit of $1.
4. Mary, who bought it for $3 from Douglas, had an implicit loss of $1.
5. Total profits ($2) equals total losses ($2).

You may argue that $2 is an arbitrary value. And I agree. Each investor has its own evaluation system and set of data. But this doe’s not change the mechanics of the system. You can try with value being $1.50 or $2.50.

It is always the same story. Total profits equals total losses.

The trader provides a service for you. When you want to buy, he sells to you. When you want to sell, he buys from you.

There is a feature of trading that benefits everybody. Trading provides liquidity to market.

Think of the trader as a money changer. He wants to make money and,

When you need to buy or sell something, liquidity is your lollipop.

Investing in stocks means split players in two classes: winners and losers.

The fact described above may not be clear to you by some reasons:

1. The market never stops for balance. It is always the unpredictable flow of the prices.
2. People don’t see, don’t care or don’t know about implicit losses.

They buy a stock for $1. After 3 years without dividend they sell the stock for $1 and doesn’t consider it a loss. It is not a loss in the accountancy sense. It is a loss in the financial sense.

3. The profitable companies keep feeding the system with value. Which attenuates losses of people.

A crisis is necessary for losers to recognize themselves.

The system — the dark forces

Now that you know what a jungle the investing/trading world is, does not seems weird how the highest trading institutions of the world release free researches and advices from their best, expensive, market analysts?

Do they care about your happiness? Do they care about your wealth?

I think they care about transfer your wealth to their own pockets.

We will see more in other articles.

To be continued

The next article is “Compound Interest: Natural Mathematics or Pure Greed?”.