When you buy a share of stock, a person or business is selling those shares of stock for some reason. Buying and selling stocks is a zero sum game. In economic theory, a zero sum game describes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participants. When a stock is issued during an initial public offering (IPO), that amount of money is the only revenue that the company receives for those shares of stock. After that time and that price, the stock is only traded on the secondary market, and there are always winners and losers in a zero sum game.
A Stock’s Price Is Built On Information
Every piece of knowledge about a company is known and already incorporated into the price of that company’s shares of stock. When an investor hears about bad news on Bloomberg or CNBC, it is already old news. That bit of information has already been priced into the price of the stock. The share price has already reacted and moved based on that knowledge. If you try and trade stock based on things you hear on TV or read in investment magazines, then you are already behind the power curve. The news is already out there in the media and on the internet, and it is usually already priced into the
If You Are Buying, Then Someone Is Selling
If you are buying shares of stock in a company, someone is selling those shares to you. Why are they selling? Maybe they need to raise money for another transaction or maybe they are selling their shares because of a planned distribution. But, more likely than not, the seller of a stock is selling because he or she thinks that the stock’s share price has run its course. They feel that it has reached its pinnacle at that particular time. They think that they have more information about that company and its future prospects than you, as the buyer, have. Keeping the reason why someone is selling their shares in the back of your mind when you are buying those same shares. Does the seller know more information than you do? Why are they selling if you think that the price is going to go up?
Eventually There Is A Loser Who Lost Money
After an IPO, stocks are traded on the open secondary market. This is what we normally consider as the typical buying and selling stocks. In the stock market, eventually there is someone who sell stock for a loss, whether it is the company when they initially issued the shares, the specialist that facilitated the transaction, or just the average guy on the street who made a poor buying decision in the first place. In the end if the stock is traded back and forth enough, there will always be a winner and a loser.
You should know why you are buying shares of stock before you ever make the purchase. You should also know what your selling criteria are as well. There will be winners who buy shares at a low and sell them at a higher price, and there will also be those investors who unfortunately do not or are not able to follow this classic wisdom for one reason or another. It is always extremely important to understand that sellers are selling for a reason. If you keep this in mind right in the beginning of your stock purchase, you will be more successful than most investors.
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