Who's Selling to You?

When you buy a stock, who are you buying it from?  And I don't mean the company that executes your transaction (Schwab, E*Trade, Fidelity).  I mean who is the person that is actually selling you the stock you purchase? 

It's easy to forget in today's faceless world of online investing.  But stocks aren't bought from the "ether" of the market.  Someone, somewhere is literally selling that stock to you.

And you will never know who that person is.  Is it Joe, your neighbor?  Or Suzy, your coworker?  Maybe it's Mary, your mother-in-law? 

If it was 1950, then it probably WAS one of these people.  Back then 90% of all stock market trading was done by "retail" investors, i.e. you, your friends, coworkers and family. 

Back then if you really did your homework it was entirely possible you knew something Joe, your neighbor didn't.  And when Joe sells you his shares of AT&T, it's to your advantage because Joe just doesn't know any better. 

How likely is that to happen today?  In 1950 90% of trading was done by these "retail" investors.  Guess how much that has changed.  80%?  70%?   

10% !

Yes, only 10% of trading today is done by you, your friends, coworkers and family. 

Who's the other 90%?  The other 90% of trading is done by institutions - mutual funds, hedge funds, endowments, pension plans. 

The other 90% has teams of people with PhD's in finance. 

Their entire job, 5 days a week, 12 hours a day is to analyze stocks to figure out which ones to buy or sell. 

They are the brightest of the bright.  They went to Harvard and Yale and Stanford. 

They get paid obnoxious salaries because what they do is obnoxiously valuable to their firms. 

And when you buy your stock, there's a 90% chance that it's one of institutional investors who is selling it to you. 

So next time before you click "buy", ask yourself "What does the person selling it to me know that I don't?" 

I don't know either.  And that's why I don't bet on stocks.