I have heard several theories lately about what happens during stock market trading. One of these ideas is that big institutional traders sell a large position of a stock in order to drive the price down by creating a much greater supply. It continues that once the price is sufficiently lowered the trader swoops back in to buy up the now cheaper shares. In theory, if they buy a big enough quantity of the stock, and thus there is less available, the price goes back up. The trader sold the stock at a high price and bought it back at a lower price.
Is this really what happens each trading day? We need to breakdown both sides of a securities trade to see what really happens.
Each time a security is traded on a secondary market, such as the Nasdaq or NY Stock Exchange, there are 2 transactions – a buy and a sell. For example, if I can buy a stock at $50 per share, then that simply means someone is willing and able to sell it to me for $50 per share (plus or minus trading costs). My order to buy is filled by finding someone willing to sell the same stock to me for $50.
If we complete the trade and the seller had acquired the stock for $40, they will have a gain. However, if they bought it for $60 and sold it to me for $50, they will have a loss. What about my investment? If I can sell it in the future for $60 per share I will have a gain, but if I sell for $40 I will have a loss. Maybe when I need the money again it will still be at $50.
This is the key part to remember – its win, lose or draw. A big institutional trader who buys or sells at the wrong price can end up with a loss. And the trader on the other side will end up further ahead or behind too, depending on the price they originally paid. Every trade is unique and only time will tell if you or any other trader has made a good investment.