When I am buy stock at a lower price point than it was trading a 1 day or week, month or year later, does it mean that somebody during that same time frame is losing the difference?
In: Economics
No.
Stocks aren’t like options, or default swaps, or many other products where the payout structure is deliberately set up to mean that person who incorrectly predicts the future has to pay the person who is correct.
Stocks make money in two ways.
First, they pay dividends. If a company has excess profit from its operations, they can simply distribute it to all of the shareholders. As an owner of the stock you get a check in the mail, and the company didn’t “lose” anything. They earned money (from operating successfully), and then doled it out.
The second is if the stock goes up in value. There’s a lot of reasons why the price of a stock goes up and down. But the most fundamental one is related to the prior point: the price of a stock goes up if someone expects that owning a stock will be more valuable in the future, and therefore desires it more. A stock becomes more valuable in the future if the dividend it pays increases.
So, say you buy a share in a company for $10, and it pays a 1% annual dividend. Then the company announcea that they’re increasing their dividend to 2% a year. Someone else may very much desire to buy a stock that pays a 2% dividend, and offers you $11. You may decide you’d rather have $11 cash in hand than this stock, so you sell.
You’ve made $1 profit on buying and selling the stock. And now someone else has a stock worth $11. Neither of you lost anything.
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