Thursday, June 18, 2009

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Your Loss Does Not Necessarily Mean Somebody’s Gain

Your Loss Does not Necessarily Mean Somebody’s GainImage Source

Whenever stock markets start falling like hell, people start questioning who is making gains now? I practically met lot of people who just can’t get over this myth. They always think somebody must be gaining if you are making a loss. “Oh.. So many traders are losing money.. Then someone must be making big money..”. You should note that a loss for a person does not necessarily imply a gain for a different person when it comes to trading stocks.

When you make a loss in the stock market, it is most likely that there are several other traders that are also making losses. That is the nature of the stock markets. Otherwise it would have been no different from a gambling casino.

In Gambling Your Loss is Somebody’s Gain

In gambling there is always some one that makes money when you make a loss. Or some one loses money if you were to make a gain. There is no inflow of money for the system other than from the participants. The fact of the matter is that gambling is designed to profit only the casino owners in the long run. There may be one or two gamblers that make money once in a while but most of the time most of the gamblers end up losing though a fixed amount of money. Too many losing gamblers add money to the casino which helps it take breath everyday.

The stock market is never like a gambling casino. In fact it is perfectly legal, mathematical and logical type of system. Its money does not just come from investors or stock traders. The stock traders add money and take away money. But on the overall money is pumped into the system externally by the companies listed on the exchanges. I had given elaborate explanations about these things already in the earlier article titled: Someone Loses When Someone Gains: Do You Have This Belief about Stock Markets?

Nobody Need to Gain When You Make a Loss

Let me get straight to the point of this article though it sounds similar to the other one. You should never think that when you end up in a loss there is somebody making a gain out of it. There is nothing like conservation of money or something like that for the stock markets. In Physics you must have known about the principle of conservation of energy but there is no principle of conservation of money in the discipline of stock trading.

The True Reality of Stock Markets

What really works in the stock market is this: Everyone makes profits during certain period of time and everyone makes losses during another period of time. These cycles continue one after another in the name of bull market and bear market phases. These are like the inspiration and expiration related to the lungs of human body.

But on the overall which dominates in the long run is determined by the state of the economy. Remember stock markets always reflect the economy. They run parallel with it. So if there is a net development in the economy which may be backed by outsourcing or industrical growth or agricultural growth. Whatever may be the reason, the stock market certainly reflects that as average net gains. That is what is most spoken by your brokerage agents as the long term gains of stock markets who persuade you to trade stocks.

Who Gains When Your House Burns?

Now if there were to be a catastrophe, natural calamity or any kind of man made or non man made destruction, for example, it will definitely influence the stock markets because the economy is now going to be affected. This will have a negative impact meaning there will be losses for everyone. May I now ask who is gaining here?

If you still wonder that there is always someone gaining, let me quote an example that a famous MoneyControl Boarder with name Kalidas used to quote often – “Who is gaining when your house is on fire?”. There is a destruction of your assets when your house goes under fire. You are definitely losing. But tell me who is going to gain from it?

Well, nobody. You can burn the currency notes in your pocket and who is gaining from it? There are, of course, instances when someone gains, for example, a pickpocketer taking away your money. But you should also know that there are instances when nobody gains. Fortunately there can also be instances when nobody loses while some are making gains from the stock market.

Stock Trading is Not So Simple

You can now note that the stock market is not as simple as it looks for the uninitiated. Stock trading is like any other discipline. It has its own rules and principles. You need to take a step ahead and learn them to differentiate yourself from the rest of the crowd. Don’t just go by pre-assumptions that you brought from your other professions. It really takes a smart mind to understand the game of stock trading.

If You Just Made a Loss…

So next time when you make a loss or find that the markets are frustrating you with everyday losses continuously, just remember this truth: stock markets run on a cyclical basis. There are times when everyone makes gains while no one loses. There are also times when everyone makes losses while no one gains.

What remains on the net is decided by the net developments in the economy of the location where the listed companies operate. Decide your next moves accordingly. To avoid pain from the losses, consider stock trading for long run. That expands your horizons and gives confidence about the future.

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