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Zero Sum Game

Most people think the stock market is a zero sum game because there is a buyer for each seller and seller for each buyer so each cancels the other and everything is equal. Not quite.

There are losers here, both the buyer and the seller because each one paid a commission to buy and a second commission to sell. This eats away at the profit of the winner and adds to the loss of the seller if he sold for less than he paid.

How does buying and selling of a stock effect the company? When you buy GM stock from your broker he is completing a transaction between you, the buyer, and someone else, the seller. The company has nothing to do with the transaction other than change the name of the shareholder on their record books. It has no effect on the corporation's finances. It is merely an expression by an individual; fund or pension plan that they think the company's stock will go up.

There is one time that purchasing a company's stock does affect their bottom line. That is when you purchase a new offering called an Initial Public Offering or IPO. The money that you pay for that stock then goes directly to the company and not to another individual. That cash is used as the company sees fit usually to fund expansion to increase both sales and profits.

Now think for a minute about the people who decided to sell their stock in Phillip Morris because they did not want to own a tobacco company stock. Will this make any difference to the company? Not a twit. The person who bought that stock was interested in only one thing ? will it go up so I can make a profit? That is why socially responsible investing makes no sense at all. It only makes the person feel better and is not a true investment decision.

Let's say you bought a stock at $20/share and sold it at $40. Double your money. Great. The guy that bought it sold it at $60 and that person sold it to someone for $80/share. Everyone is happy. So far. But this last stock buyer now watches the stock head down and he decides to get out at $60. Mr. $60 watches it drop to $20 where it dies and does not recover. Sounds like Lucent doesn't it? The last 2 buyers don't think this is a zero sum game.

Let me add that I think the smartest guy in the bunch was the one who took his loss and sold out at $60. He limited his loss and still has money left to find a better issue. He was smart enough not to "wait for it to go back up so he could get out even". Unfortunately, most people think this way. It may be close to a zero sum game, but you don't want to end up with the zero.

Copyright 2005

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

1-888-345-7870; al@mutualfundstrategy.com

In The News:

Remarkable aerial pictures show pink-colored snow in the Presena glacier in the Italian Alps.
A prehistoric ocher mine has been discovered in a flooded cave complex in Mexico.
Researchers have discovered that enormous sea scorpions bigger than a human swam the oceans prior to the age of the dinosaurs.
A photographer has snapped a remarkable image of a young lion cub appearing to give a kiss on its mother's nose.
Israel launched a new spy satellite into orbit from a launchpad in the center of the country early Monday morning, the Defense Ministry said.
NASA experts have used radar technology to shed new light on the subsurface of the moon.
Just days after it spotted a "bat shadow," the Hubble Space Telescope has found a "feathered spiral" galaxy in deep space.
Just days after it pulled the plug on its rheumatoid arthritis drug to treat COVID-19, biotech company Regeneron said on Monday it was starting Phase III of its double-antibody treatment for the novel coronavirus.
The decapitated bodies of at least five sea lions found on the shores of Vancouver Island, Canada, over the past few months hint that there may be a marine-mammal serial killer on the loose, or perhaps someone who is lopping off the heads of already dead sea lions, according to news sources. 
Skywatchers have been enjoying the buck moon or July full moon.

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