Where does the money come from in Profit Taking?

[Dr.3D]

Here is a question I have had for some time now.

Where exactly does the profit money come from when someone 'profit takes'?

We know the money doesn't come from out of thin air, so it has to come from some place. We know the price of something goes up when there is less supply of it and of course the price goes down when there is a greater supply of it.

If somebody with a great deal of money bought a great amount of something and force the price up, couldn't he then sell what he just bought at the higher price and take the so called profit? If so, then where did the money for that profit come from?

Just what keeps people with a lot of money from pumping the system?

 

[Truth Warrior]

The "smart money" takes it from the "dumb money". That's pretty much how it always works. The "smart money" buys at the bottom and sells at the top. The "dumb money" buys at the top and sells at the bottom.

 

[Dr.3D]

The "smart money" takes it from the "dumb money". That's pretty much how it always works. The "smart money" buys at the bottom and sells at the top. The "dumb money" buys at the top and sells at the bottom.

How about the person who is able to buy any time and force the price up and then immediately sell to make a profit?

Let's take a scenario like this one:

1. Buy a lot of something at any time, forcing the price up.
2. Now that the price has been forced up, sell what was just bought and make a profit.
3. Repeat from step one to make even more profit.

The buying of the item did force the price up but no extra money was used to do so.
When the price was up, the selling of that item then took a profit from the higher price caused by the previous purchase. No extra money was placed into the item but there was a profit taken. So where did the money come from when the item was sold?

Seems 'smart money' = having a lot of money to force up the price of an item.

'Smart money' can just pump the system?

 

[Truth Warrior]

How about the person who is able to buy any time and force the price up and then immediately sell to make a profit?

Let's take a scenario like this one:

1. Buy a lot of something at any time, forcing the price up.
2. Now that the price has been forced up, sell what was just bought and make a profit.
3. Repeat from step one to make even more profit.

The buying of the item did force the price up but no extra money was used to do so.
When the price was up, the selling of that item then took a profit from the higher price caused by the previous purchase. No extra money was placed into the item but there was a profit taken. So where did the money come from when the item was sold?

Seems 'smart money' = having a lot of money to force up the price of an item.

'Smart money' can just pump the system?

Yep, they sometimes do it that way too.<IMHO> There are a variety of tops and bottoms in the markets, depending on your preferred time scale and methods.

http://money.cnn.com/magazines/moneymag/moneymag_archive/2001/06/01/303368/index.htm

Thanks!

 

[Zavoi]

How about the person who is able to buy any time and force the price up and then immediately sell to make a profit?

Let's take a scenario like this one:

1. Buy a lot of something at any time, forcing the price up.
2. Now that the price has been forced up, sell what was just bought and make a profit.
3. Repeat from step one to make even more profit.

The buying of the item did force the price up but no extra money was used to do so.
When the price was up, the selling of that item then took a profit from the higher price caused by the previous purchase. No extra money was placed into the item but there was a profit taken. So where did the money come from when the item was sold?

Seems 'smart money' = having a lot of money to force up the price of an item.

'Smart money' can just pump the system?

I don't think this is possible. When you dump so much of something onto the market, there will be so much quantity supplied, and so little quantity demanded at the current market price, that you will have to lower your asking price in order to sell it all. The result is that you don't get any greater return on your money than if you had only bought a small amount.

 

[Dr.3D]

I don't think this is possible. When you dump so much of something onto the market, there will be so much quantity supplied, and so little quantity demanded at the current market price, that you will have to lower your asking price in order to sell it all. The result is that you don't get any greater return on your money than if you had only bought a small amount.

If you look at the bid spot price of the item and it says a certain amount, then can you not sell all of your holdings in that item at that bid spot price? If so, then you just sold all of those holdings and then the extra supply of that item would bring the price down. Is there a limit as to how much you can sell at the spot bid price?

 

[Cowlesy]

If you look at the bid spot price of the item and it says a certain amount, then can you not sell all of your holdings in that item at that bid spot price? If so, then you just sold all of those holdings and then the extra supply of that item would bring the price down. Is there a limit as to how much you can sell at the spot bid price?

Depends on demand/volume. If someone will bid $98 for 100 shares of GLD, and someone is willing to sell 100 shares of GLD at $98, then the buyer/seller can conduct a transaction.

If you want to sell 900,000 shares of GLD but the current bid price is only supported by 100,000 shares of demand...you may have to go further down into the bids to find demand large enough to buy 900,000 shares. The other day a block trade like this went through, I saw the immediate spike in volume (for # of shares sold) and an immediate price decrease. Soon thereafter, the price began to climb back up as the higher bid orders and ask prices began to be matched up.

 

[OptionsTrader]

You often times do not need to have bought in order to sell.

Market participants work to bring balance to the buy and sell sides of a stock or commodity by allowing short selling as an opening transaction, not just buying to open. If the price declines I can buy to cover for a profit; sell high buy low, the opposite of buy low sell high, but it requires margin and you have to maintain margin requirements or you can be subject to a "margin call."

As Yoda would say, short selling brings balance to the force, hmmm, yessss.

 

[Dr.3D]

Depends on demand/volume. If someone will bid $98 for 100 shares of GLD, and someone is willing to sell 100 shares of GLD at $98, then the buyer/seller can conduct a transaction.

If you want to sell 900,000 shares of GLD but the current bid price is only supported by 100,000 shares of demand...you may have to go further down into the bids to find demand large enough to buy 900,000 shares. The other day a block trade like this went through, I saw the immediate spike in volume (for # of shares sold) and an immediate price decrease. Soon thereafter, the price began to climb back up as the higher bid orders and ask prices began to be matched up.

Suppose I had 500,000 ounces of gold and the spot bid was $972 at the time I wanted to sell the 500,000 ounces of gold. Wouldn't I be able to sell all of that gold at the $972 spot bid at that time?

 

[OptionsTrader]

Suppose I had 500,000 ounces of gold and the spot bid was $972 at the time I wanted to sell the 500,000 ounces of gold. Wouldn't I be able to sell all of that gold at the $972 spot bid at that time?

No, the bid is the highest bid price, and it is probably not an order sufficient to soak up that much selling.If you make that order an all or none "limit order", your order would not go through unless you lower your selling price. If you entered a "market order" you would probable see 5 or 6 blocks trade to liquidate your position, and the bids that it would hit would be progressively lower in price.

If you google "level 2" you will get an idea of how the market is working behind that bid price you see.