Your profits come from the losses of those on the other side of your trades.

There are always two sides to every trade. If are buying shares, then someone is taking the opposite position by selling you those shares. You are saying yes, the market proposition will happen, they are saying no, it won't. If you turn out to be correct, your profits come for the person who sold you the shares - the person who took a losing position.

Let's look at an example. Trader A buys shares from Trader B at a price of $6.50. 

If the market proposition happens the market is settled at $10.00:

  • Trader A (the buyer) will have a profit of $3.50 per share
  • Trader B (the seller) will have a loss of $3.50 per share

If the market event does not happen the market is settled at $0.00:

  • Trader A (the buyer) will have a loss of $6.50 per share
  • Trader B (the seller) will have a profit of $6.50 per share

As you can see, the profits of those with the winning positions match the losses of those with losing positions. Those losses are simply transferred to the winners as profit. If the market settles at $10.00 then the profits for the buyers comes from the losses of the short sellers. If the market settles at $0.00 then the profits of the short sellers come from the losses of the buyers.

Because a trade always requires a buyer and a seller there is always the exact same number of shares sold as there are bought. Therefore, there is always a perfect balance between profits and losses.