I just got into the stocks market. AFAIK every transaction must have someone selling and someone buying, both thinking that they will be making money. How can both be making money?
Does that mean at least half of everyone in the stocks market will have to be losers?
In: 97
One thing you’re missing is dividends. Many “mature” companies pay part of their profits as dividends every year. So if your shares of XYZ Company represent 1 millionth of all the shares of XYZ Company, and XYZ Company pays $100 million in dividends per year, that means you get $100 per year.
So if you paid $1500 for your shares of XYZ Company, after 15 years you’ll have gotten $1500 back in dividends — but you’ll *still* have your shares of XYZ Company and those shares will *still* be getting $100 a year!
Okay, so where does the “free money” come from? Well, XYZ Company is selling goods or services that customers pay money for, and they generally charge customers more than it costs. If XYZ Company management is good at their jobs, this generates a huge pile of money, that belongs to the company owners — including *you* (since you own one millionth of the company). A dividend is simply the process of XYZ Company sending that pile of money to its owners’ bank accounts, including your tiny one-millionth slice, which usually goes into your account on the stock trading website you use (from where you can send it on to your bank account if you want to spend it on something besides more stocks).
Also, I’ve been talking as if “XYZ dividend = $100 a year forever,” but this isn’t guaranteed. If XYZ does good business then it might start paying you *more* than $100 a year. If it does bad business, it might pay less than $100 in dividends, or stop paying dividends, or go out of business entirely so you can’t even sell the stock anymore. (Theoretically as a shareholder you have a claim to the company’s assets if it goes bankrupt, but in practice you’ll probably get nothing because your claim is last in line — usually all the company’s assets run out before you get anything, because a bankrupt company often has unpaid payroll, unpaid bills, and unpaid loans it got in better times from banks or bondholders.)
For “immature” companies, including a lot of tech companies, they usually hope to either get bought by a bigger company, or spend more than they earn on a strategy to go huge. Successful bets on immature companies can be huge wins, but for every Google or Amazon, there’s lots — 5, 10, maybe 20 — of companies that are epic failures like [pets.com](https://en.wikipedia.org/wiki/Pets.com) or [Blockbuster](https://en.wikipedia.org/wiki/Blockbuster_LLC).
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