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My father likes to relate how risky the stock market is by saying that the same shares of stock are being sold over and over again, and that some day those shares are going to have to be repaid to the original owners.

As an example, he use a grocery store. If the grocer runs out of peas, he goes to another grocer and borrows 10 cans of peas which he takes back to his store and sells. At some point, he will have to return those peas to the grocer from which he borrowed them. If peas happen to cost more to replace when the time comes to repay, he will have lost money on the transaction.

Could someone please clarify this for me? Does it really work this way? Can 1 million shares of Company X really be traded if only 300,000 actual shares exist?

I appreciate any help you can offer.

Thanks,

Ed.
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edmong wrote:
My father likes to relate how risky the stock market is by saying that the same shares of stock are being sold over and over again, and that some day those shares are going to have to be repaid to the original owners.

[snip]

Could someone please clarify this for me? Does it really work this way? Can 1 million shares of Company X really be traded if only 300,000 actual shares exist?

Hmm, where do I start here?

First off, yes, the stock market is risky. People just watching the Nasdaq skyrocket can lose sight of the fact that the market can go down too, and you have to be cautious and do your homework.

It seems like your father is talking about short selling, where you borrow shares from another person through your broker, then sell those shares in the market. Later, you would buy those shares back in the market, hopefully for less, and then return them to the lender.

However, if you buy shares in the market, you never have to return them. Whoever had them before was the rightful owner, and then you paid him for the shares and now you are the owner. You can take your shares to the grave with you if you so wish.

Yes, it is possible for more shares to trade than actually exist, but only if buyers subsequently sell. Using the example of Company X with 300,000 shares outstanding, suppose Ann has those shares. She sells 250,000 to Bob. Bob is a day trader and quickly sells all the shares to Cathy, who sells then to Dave, who sells them to Eva. There, a million shares just traded. But when it's all over, there are still 300,000 shares of Company X. It's useful to keep in mind that for every trade there is a buyer and a seller. That's just the way it works.

Hope that helps,
WeldonM
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Thanks for the reply, WeldonM.

So, just to clarify. Mututal fund X and Mutual fund Y cannot both claim to own the same 100,000 shares of company Z?

If this is so, I will have to ask Dad where he got the information he is passing around.

Ed.
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edmong wrote
So, just to clarify. Mututal fund X and Mutual fund Y cannot both claim to own the same 100,000 shares of company Z?

Yes, that is my understanding.

--WeldonM
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