Some basic questions

Ashish Jain · #1 12th October 2004, 10:08 PM

Pardon me, if the questions are too basic. But frankly speaking I (and even my friends who deal in stock markets) don't know the answers !

In share market, does the profit of someone necessarily means a loss of someone else?

Also, is the trading (buying and selling) of a stock is the only cause of the fluctuation in the price of it? Or are there other factors which can bring down or pull up the value of a stock?

Traderji · #2 13th October 2004, 07:58 AM

Quote:

Originally Posted by Ashish Jain

In share market, does the profit of someone necessarily means a loss of someone else?

In the stock market it is not so. The stock market is a non zero sum game.

But this is true in the futures markets where one mans loss is another mans gain. For more info on this read this post on zero sum game

Quote:

Originally Posted by Ashish Jain

Also, is the trading (buying and selling) of a stock is the only cause of the fluctuation in the price of it? Or are there other factors which can bring down or pull up the value of a stock?

There are a number of reasons for the cause of fluctuation in the price of a stock. The primary being demand and supply which again are influenced by other fastors like earnings, future growth prospects, etc of that company.

Ashish Jain · #3 13th October 2004, 08:02 PM

Traderji,

Thanks for the answers. But your answers raise few more questions. Let me take the second answer of yours first.

Quote:

Originally Posted by Traderji

There are a number of reasons for the cause of fluctuation in the price of a stock. The primary being demand and supply which again are influenced by other fastors like earnings, future growth prospects, etc of that company.

Doesn't demand and supply means trading? If there is no trading on a stock, it should mean there is no demand and hence no supply. What if, I want to sell a share, but there are no buyers? What if I want to buy a share and there are no sellers? To my understanding, its a game of demand and supply. If both are zero, wouldn't the price of a share remain constant?

Let me take the first answer of yours now. I saw the thread of zero-sum game. There you are saying...

Quote:

Originally Posted by Traderji

The stock market is a nonzero-sum game. For example, I buy RIL for 375. I sell it a week latter for 385 to Stock Buyer-2. Stock Buyer-2 sells the same stock a week latter for 395. I made money and Stock Buyer-2 made money. No one lost money.

I think stock buyer-3 lost the money ! Doesn't he? Stock buyer-3 bought the share at 395 when the initial price of share was 375. We can't say that stock buyer-3 gained the money until and unless he sells the share to stock buyer-4 at higher price. In that case stock buyer-4 will lose money on the cost of buyer 1's, 2's and 3's gain.

Quote:

Originally Posted by Traderji

This same process can yield losses when for everyone when stock prices declines. If I buy RIL at 395 and sell it to Stock Buyer-2 for 385 and Stock Buyer-2 sells RIL for 375, then we both have a loss. Everyone lost money.

Based on the above logic, here I think stock buyer-3 gained the money.

Actually speaking, both the above questions are related to each other. I am sure, you are correct. But I am not sure whether I am wrong

. This has caused some more questions in my mind. I'll open a new thread for it. Otherwise things will become to hot to handle.

Traderji · #4 13th October 2004, 08:56 PM

Quote:

Doesn't demand and supply means trading? If there is no trading on a stock, it should mean there is no demand and hence no supply. What if, I want to sell a share, but there are no buyers? What if I want to buy a share and there are no sellers? To my understanding, its a game of demand and supply. If both are zero, wouldn't the price of a share remain constant?

YES!

Quote:

I think stock buyer-3 lost the money ! Doesn't he? Stock buyer-3 bought the share at 395 when the initial price of share was 375. We can't say that stock buyer-3 gained the money until and unless he sells the share to stock buyer-4 at higher price. In that case stock buyer-4 will lose money on the cost of buyer 1's, 2's and 3's gain.

If stock buyer-3 sells it at a higher price than he bought them at then he will obviously make money.

Ashish Jain · #5 13th October 2004, 09:16 PM

Quote:

Originally Posted by Traderji

Quote:

Originally Posted by Ashish Jain

Doesn't demand and supply means trading? If there is no trading on a stock, it should mean there is no demand and hence no supply. What if, I want to sell a share, but there are no buyers? What if I want to buy a share and there are no sellers? To my understanding, its a game of demand and supply. If both are zero, wouldn't the price of a share remain constant?

YES!

Then it obviously means that trading is the only cause of fluctuations !

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