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Trading is a zero sum game
I often hear people on this site say trading is a zero sum game. In other words someone must lose money for someone else to make money. I admit I am new to trading but I cannot figure out why that is always true.
Poker is often a zero sum game.
If 4 people come to a poker table with $1000 a piece, the only way for one person to leave with more than the $1000 they brought to the table is to take it from one of the other people at the table. There was only $4000 at the beginning of the game and there will only be that much at the end of the game. Of course that is very obvious in poker and may initially seem to be true in trading--but I take a different view.
If a trader buys a stock for $20 and sells it for $21 it would only be zero sum if I buy and sell to the same person. Since the job of a specialist or market maker is to match buyers and sellers it seems that this would rarely be the case.
The trader could be buying and selling to people with very different time frames. The purchase for $20 in the morning may have been from the account of the specialist who bought the stock from a hedge fund. And the sale for $21 may be to someone who believes the stock will go to $30 over the next six months based on sound fundamentals and growth.
Since traders and investors have different time frames and make money in different ways, a trade is not zero sum.
This is just my opinion and I would love to hear other views on the subject----
Elder in his book said trading was a minus-sum game. Since the slippages and the commissions would draw money away from the traders. I am not sure about the stock market. People can create a new company and sell the shares of it. Many doc-com looked like creating something from nothing. But in the futures market, I think it is a minus-sum game.
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If you cannot get what you like, like what you have.
at the end not everyone can sell with a profit. the one who buys at the top and all those who bought on lower tops on the way down are the ones who pay the party eventually. the amount of money involved stays the same i think.
Stock trading is not a zero-sum game. Futures trading is a zero-sum game. You have to remember though, after commisions and fees, both often become a minus sum game for all participants.
This is b/c with stock there are finite shares so the value can rise and everyone theoretically can all be long, hence no one loses money. With futures, it is a contract, which means for every contract that you go long, someone else HAS to be short, so when one makes money the other loses.
Hope this helps!
MUChris
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Don't fight the market, but don't let it beat the $h1t out of you either.
It depends on what market you are trading, but the equities market is not a zero sum game. Despite what some of the people on this thread imply when they constantly thank the losing traders for lining their pockets, the $8 trillion in market cap that has been lost in this market did not flow into the accounts of a few smart traders. For this to happen there would have had to have been an equal amount of shares short in each stock as there were long.
a) The stock market *IS* essentially a zero-sum game. Money isn't created from nothing. If someone puts an extra dollar in their account at the end of the day, that dollar has to come from somewhere. Unless someone is pumping money into the economy (inflation), everything balances out in the long-term.
It is incorrect to assume that everyone can be "long" a stock and suddenly everyone has all this extra money. The very fact that everyone is long is the reason why the price is so high. How many people were millionares on paper in 2000? In order to sell and CASH OUT, someone has to be willing to buy it back. As the price plummets, the people at the top are getting the dollars from the people who are buying against the trend down.
b) Technically, one could even argue that future's is not a zero-sum game. You are assuming everyone is playing to win. Some people are playing to hedge and offset risk -- they aren't speculating. If you take the hedger's money, you are winning, but he's also winning but in a different risk category.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Without considering the bid/ask spreads and commissions, the stock market is absolutely NOT a zero-sum game. Consider the following situation.
A company issues 1000 shares at a price of $100 and 100 people each buy 10 shares. Suddenly the company says "Haha...we don't have any revenue" and the price drops to say $50. Instantaneously $50 * 1000 was lost by everyone owing the company stock...nobody here offsets this loss with a gain.
On the other hand, the futures market is a zero-sum game (no spread or commissions assumed). Since you are trading contractual obligations (can be thought of as a bet). In effect for you to gain on a long futures contract the value of the contract has to increase, when this happens you gain...but the poor sucker who wrote the contract (the person short) would have to pay you dollar for dollar for every penny that you made and vice-versa. Options are also a zero-sum game.
Originally posted by bidmasterx
Without considering the bid/ask spreads and commissions, the stock market is absolutely NOT a zero-sum game. Consider the following situation.
A company issues 1000 shares at a price of $100 and 100 people each buy 10 shares. Suddenly the company says "Haha...we don't have any revenue" and the price drops to say $50. Instantaneously $50 * 1000 was lost by everyone owing the company stock...nobody here offsets this loss with a gain.
On the other hand, the futures market is a zero-sum game (no spread or commissions assumed). Since you are trading contractual obligations (can be thought of as a bet). In effect for you to gain on a long futures contract the value of the contract has to increase, when this happens you gain...but the poor sucker who wrote the contract (the person short) would have to pay you dollar for dollar for every penny that you made and vice-versa. Options are also a zero-sum game.
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Freedom, I have much love for ya!!
Those stating that the equities market is a zero sum game are incorrect. As Jorge and others stated, the futures markets and the options markets are. The definition of zero sum game as it applies to markets refers to buyers and sellers.
In a zero sum game, there is a buyer and seller for each contract, there are no borrowers. The futures markets and the options markets are zero sum. It has nothing to do with commissions and slippage, and wealth or any of that.
Short-selling in equities markets is what separares equities from futures and options. As you know, shorts borrow stock. More stock is not created to sell, unlike futures and options. For each buyer and seller in futures and options, a new contract is created. Nothing is borrowed.
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You must be in to win!
Originally posted by aphexcoil
b) Technically, one could even argue that future's is not a zero-sum game. You are assuming everyone is playing to win. Some people are playing to hedge and offset risk -- they aren't speculating. If you take the hedger's money, you are winning, but he's also winning but in a different risk category.
inandlong
I think it has alot to do with commissions....they play a role on it not being a true zero-sum game
you can be gross positive and net negative......think about it..
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Freedom, I have much love for ya!!
Originally posted by MUChris
...
This is b/c with stock there are finite shares so the value can rise and everyone theoretically can all be long, hence no one loses money.
...
MUChris
The term zero sum game has nothing to do with profits or losses.
I understand what you are saying El, but it has nothing to do with a zero sum game. I am not expressing an opinion. Zero sum means for every winner there is a loser of equal value. That is it. It doesn't matter about hedgeing, or commissions, or premium, or slippage. Those things have nothing to do with the zero sum instrument. Those are extraneous to the instrument.
To break it down to about as simple as I can, if I sell a futures contract to you, and my commission is $5 and your commission is $4, then by what you guys are saying, there is not a zero sum. What has happened is, the term zero sum is being applied where it should not be. The term can be applied only to the contracts themselves, not the aggregate of commission, slippage, hedge, premium, profit, and loss, etc.
It is the application of the term zero sum where it should not be applied that is in error on this thread.
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You must be in to win!
Originally posted by aphexcoil
a)
It is incorrect to assume that everyone can be "long" a stock and suddenly everyone has all this extra money. The very fact that everyone is long is the reason why the price is so high. How many people were millionares on paper in 2000? In order to sell and CASH OUT, someone has to be willing to buy it back. As the price plummets, the people at the top are getting the dollars from the people who are buying against the trend down.
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Don't fight the market, but don't let it beat the $h1t out of you either.
even though everything that needs to be said about this has been - ie, stocks aren't zero sum, futures are (ignoring commish) - i can see this thread going on for pointless page after page..
Aphexcoil again proves how little he understands about market mechanics. For the stock market to be a zero-sum game there has to be someone short for every long. If you ever read a book on technical analysis you would know about a number called short interest. Short interest is the number of shares that are short in a given stock. The number is typically in the 10-25 percent range. This proves there is not an equal number long and short. To give you a simple example:
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Originally posted by aphexcoil
So, in essense, the stock market is a magical place where money is created and more people can leave with more money than they came with without that money coming from another person's pocket?
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Don't fight the market, but don't let it beat the $h1t out of you either.
Originally posted by aphexcoil
Personal attacks are not necessary. So, in essense, the stock market is a magical place where money is created and more people can leave with more money than they came with without that money coming from another person's pocket?
.
Originally posted by MUChris
Its called the wealth effect. And not just the stock market, any time you buy an asset that appreciates (stock, bonds, coins, stamps) you are benefitting from that "magic."
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Freedom, I have much love for ya!!
come on cubano, you're better than that. it simply means that the stockmarket isn't a zero sum game, not that nobody ever loses...
Originally posted by ElCubano
HUH??? tell that to the people that bought the top and have lost over 8 trillion in your "magic" wealth effect..........
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Don't fight the market, but don't let it beat the $h1t out of you either.
Originally posted by daniel_m
come on cubano, you're better than that. it simply means that the stockmarket isn't a zero sum game, not that nobody ever loses...
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Freedom, I have much love for ya!!
Anytime a stock drops below its initial offering price, that stock is a negative sum game for the participants.
Here it is at the very basic level:
The earth contains "stuff" that does not really increase or decrease. This stuff, often called "resources" can be used for various functions.
A person or group of people will assign a value to ANYTHING. This includes everything from gold, corn, computers, lumber, oil, etc.
Well, if something "increases" in value, it simply means that either demand has increased for it or the supply of that commodity or resource has decreased -- or both.
If a stamp or rare coin increases in value, it is not because it is a magic little thing that is creating money out of thin air. The amount of money in circulation at any given time will remain the same until the supply on that money is changed.
That rare stamp was, at some point in time, purchased for let's say a quarter. Why, 80 years later, is that stamp worth 100 dollars? Well, what is the supply of that stamp relative to whe it was first issued? If I sell it to someone 80 years later (let's forget about inflation) and someone gives me $100 for it -- we can say that the money had to come from somewhere -- so who loses the $99.75? The Post office? The guy buying? What will he sell it for?
A lot of people don't seem to have a solid grasp of fundamental economics. 
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Originally posted by TriPack
Anytime a stock drops below its initial offering price, that stock is a negative sum game for the participants.
Money is not created or destroyed in the markets. It simply tades hands.
It is a zero some game in all markets. Or as some like to call it a minus some game.
Originally posted by daniel_m
except the people that initially sold the stock..
(and that would only permanently be true if the company ceased to exist..)
if that was the definition of ZSG, then poker with more than 2 players would not qualify as ZSG, because the distribution of losses among losers is rarely identical to the distribution of gains among winners. for example, imagine a poker game of 4 participants where three people win and one loses...
Originally posted by inandlong
Zero sum means for every winner there is a loser of equal value.
Originally posted by cheeks
Money is not created or destroyed in the markets. It simply tades hands.
ZSG
company is created with 10 shares at $10 bucks. 1 share is sold at $20. value of company = $200. if this is ZSG, then who lost the 100 bucks?
Re: ZSG
Originally posted by QQQBALL
company is created with 10 shares at $10 bucks. 1 share is sold at $20. value of company = $200. if this is ZSG, then who lost the 100 bucks?
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Freedom, I have much love for ya!!
Re: ZSG
Originally posted by QQQBALL
company is created with 10 shares at $10 bucks. 1 share is sold at $20. value of company = $200. if this is ZSG, then who lost the 100 bucks?
Re: Re: ZSG
Originally posted by darkhorse
The economy goes into a death spiral and Robert Prechter decisively proves how Elliott Wave predicted the whole thing.
p.s. thx Cubano, though I didn't really leave that time- just kind of lost interest in posting for a bit. it comes and goes
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i made alot of money when i first started trading....unfortunately i lost more!
Re: Re: Re: ZSG
Originally posted by Ron In-a-sauna
bringing up prechter and elliot wave opens up a whole can of worms....this alone could fill up thousands of pages of dribble.
imo...scenario is possible, but not likely.
jaan, kind of close, but no cigar!
Five guys come to play poker, 5 grand buy-in, winner take all. Total of 25 in the game then right? No more, no less.
One guy wins it all. There is still a total of 25K. No more , no less.
Zero sum means there is no net gain or loss! Period.
ZERO SUM means when you add the components together the sum is ZERO!
Hence the name... ZERO SUM. Get it? Zero sum..... zzzzeeeeerrrrrrooooo ......sum!
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You must be in to win!
Re: Re: ZSG
Originally posted by darkhorse
if i buy a stick of gum from you for $100, have i lost $100?
what if i turn around and sell it to my idiot cousin for $101?
what if my cousin then sells it to his neighbor for $105?
if the neighbor eats the stick of gum by accident, then he has lost $105- Where did it go? Follow the money. $100 went into your pocket, $1 into mine, and $4 into my cousin's.
But it wasn't the neighbor's $105 in the first place: he borrowed that money from the bank. Now he's broke, so he defaults on the loan and screws the bank. The bank is pissed because this has been happening a lot lately, making their books look sketchy. So they stop lending money for bubblegum and start calling what loans they do have. Bubblegum makers are put in a pinch and start laying off workers. More loans default. More capital is destroyed.
The economy goes into a death spiral and Robert Prechter decisively proves how Elliott Wave predicted the whole thing.
p.s. thx Cubano, though I didn't really leave that time- just kind of lost interest in posting for a bit. it comes and goes
Re: Re: Re: ZSG
Originally posted by QQQBALL
ZSG implies that there is a ZERO SUM..... the stock market is not ZSG. my example was fairly simple - who lost $100 - the answer is also very simple - NOBODY! Gum, cousins and all manner of confusion will not change that.
the stock market is not a zero sum game in the long term.assets are created from ideas and services.think of it like a house.you start with 50k worth of materials and the carpenter spends 50k worth of labor and when he is finished it is worth 200k.same thing in stocks.bill gates had an idea.lots of people want to buy his idea(software).so microsoft was built from an idea to a valuable asset.no one had to lose money for that to happen.
another example:a farmer puts a seed in the ground.it grows into a valuable asset from nothing.same principle.
Re: Trading is a zero sum game
Originally posted by breakin
I often hear people on this site say trading is a zero sum game. In other words someone must lose money for someone else to make money. I admit I am new to trading but I cannot figure out why that is always true.
Poker is often a zero sum game.
If 4 people come to a poker table with $1000 a piece, the only way for one person to leave with more than the $1000 they brought to the table is to take it from one of the other people at the table. There was only $4000 at the beginning of the game and there will only be that much at the end of the game. Of course that is very obvious in poker and may initially seem to be true in trading--but I take a different view.
If a trader buys a stock for $20 and sells it for $21 it would only be zero sum if I buy and sell to the same person. Since the job of a specialist or market maker is to match buyers and sellers it seems that this would rarely be the case.
The trader could be buying and selling to people with very different time frames. The purchase for $20 in the morning may have been from the account of the specialist who bought the stock from a hedge fund. And the sale for $21 may be to someone who believes the stock will go to $30 over the next six months based on sound fundamentals and growth.
Since traders and investors have different time frames and make money in different ways, a trade is not zero sum.
This is just my opinion and I would love to hear other views on the subject----
Re: Re: Re: Re: ZSG
Originally posted by darkhorse
a) there is no free lunch.
b) if there is no free lunch, then somebody must be paying for it.
Do you understand the fractional reserve system? Do you understand that fiat money can be created and destroyed via strokes on a keyboard, that massive dislocations of capital in either direction can rip apart the structure of an economy, that retirees are dependent on younger generations holding up the value of their stocks as they cash out, that the only way the masses can win long term is if a minority creates a sustainable rise in value through some form of innovation or action and then shares it with the rest of humanity, that wealth transfer is a real and constant phenomenon, that capital consistently flows from irrational hands to rational ones just as water seeks its own level, and that it happens in a million different ways both intentional and unintentional?
There are clear losers when the money supply contracts, just as there are clear losers in a game of musical chairs. When credit flows expand at a rate faster than true value is being created, they will necessarily contract sooner or later, causing messiness and pain in the process as fools reap their folly. This happens over and over because people are prone to overreaching. In your "who loses" question you assume no one loses simply because the loss hasn't been realized yet, but the length of holding time is irrelevant, the ultimate cashout point is what matters. As long as credit flows are expanding, everyone can be winning- TEMPORARILY- just as no one is losing in musical chairs when the music is still playing. But the only way credit flows can expand PERMANENTLY is IF some real value, some sustainable gain, is created that then establishes a new floor (value players prefer buying as close to this 'floor' as possible). And if new value is created, then it was smart thinking or hard work wot done it- again not free, had to come from someone's hands or head. The government and many people think and act as if gains are free but they are really not. Fiat paper is free. Sustained value add requires innovation and hard work. And there will always be rubes who get too excited and shills to egg them on, thus there will always be booms that go too far in response to progress and inevitable busts in response.
It's a zero sum game that expands and contracts and never stops, though the size of the game gets bigger w/ time. Winners today can be losers tomorrow and vice versa, and with equities the decision can be put on hold for 5 or 10 or even 100 years, unlike a futures contract with an expiration date. But in the short run output must always be matched by input. If your stock goes down on Monday and back up on Tuesday, it was different dollars that pushed it back up. Output must match input in the long run too- ZSG minus the vig- but the picture is muddled by the fact that we are heavily betting that long term inputs will continue on an upward trend. The whole world is dependent on a minority of individuals to maintain a continual inflow of knowledge and productivity resulting in long term value add.
Originally posted by vhehn
another example:a farmer puts a seed in the ground.it grows into a valuable asset from nothing.same principle.
"Well actually, the seed draws on resources from the soil and the sun and the rain and uses them in a productive way to sustain its growth."
ok so the soil lost money then.lol
Originally posted by vhehn
ok so the soil lost money then.lol
Life is a zero sum game. For me to acquire money it has to come from someone else.
Runningbear
darkhorse this may be the first time I question your thoughts. (Perhaps you need to write more frequently as you do not seem as sharp as normal)
In theory the stockmarket is not zero sum is because there are not equal shorts to longs. This allows for the possibility of outside work causing the market to go up. I am sure if you owned gm from the ipo- the dividends gave your more than the ipo price. so you could sell the stock to the next guy for whatever and still be a winner. Then he could sell it later and also be a winner and you know what there would be no loser. It is by my understanding that is by definition why in theory the stock market is zero sum.
Now it seems to me the stuff you were talking about was true but not really dispositive. It seems the question here is a technical one. What does zero sum mean and is the stock market zero sum (apart from commissions). Your answer really seemed to address the question of what is value.
Life is a zero sum game. For me to acquire money it has to come from someone else.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
darkhorse, in typical fashion, is unnecessarily complicating matters. sure everything, at some level, is connected, but in order to be able to succinctly and coherently discuss a certain subject we need to arbritrarily draw the line at some point as to what is relevant. otherwise we'd have to drag ourselves through a quagmire of epistemology every time we wanted do discuss some topic. in the case of ZSG and the stockmarket, that line is drawn at the dollar value positions (long and short) of the market participants. as the stockmarket is a perpetual entity and there are unequal amounts of longs and shorts, for the purposes of this discussion (not to mention for the purposes of making money) the stock market is not a zero sum game.
PS- welcome back cuz' (the moons a waxin' again is it?
)
Originally posted by Runningbear
Life is a zero sum game. For me to acquire money it has to come from someone else.
Originally posted by daniel_m
now that is just not true at all. value is created by mankind, therefore your gain is not necessarily someone else's loss. ( i trust you don't feel that you've "lost" money when you buy a loaf of bread do you?)
futures Vs Stock
Futures are a zero sum game. This means that for every winner, there is a loser - quite unlike the equities market where every investor can potentially be a "winner", as on average, prices rise over time due to inflation.
When trading costs are taken into account (brokerage fees and the spread between bid and ask prices), trading futures without an edge is akin to playing roulette. A buy or sell is equivalent to betting on red or black, and trading costs are the '00' on the roulette wheel. Over time it is a certainty that playing roulette will lose money, as will trading futures without an edge.
that's correct. i was just humbly pointing out the error in your original definition:
Originally posted by inandlong
ZERO SUM means when you add the components together the sum is ZERO!
...as the ZSG does not require that winners and losers "match up" one by one. only the sum is important.
Originally posted by inandlong
Zero sum means for every winner there is a loser of equal value.
Not necessarily. Options are a zero sum game because there is one contract and one buyer and seller for each contract. Stocks tend to appreciate over time and there should be more winners than losers. Some win bigger than others.
Stocks are a Zero-sum game -- tell me how everyone can be a winner? Where is this money coming from?
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
aphie, stocks not being a ZSG doesn't imply that everyone will be, or everyone can be, a winner.
i would advise you to read again the descriptions of the stockmarket that preclude it from being a ZSG, rather than rashly posting in defence of your assertion that it is.
Originally posted by aphexcoil
Stocks are a Zero-sum game -- tell me how everyone can be a winner? Where is this money coming from?
Mr. Daniel,
First let's start out with an exact definition of "Zero Sum."
A Zero-Sum game is that which everything put into the system is all that can be taken out of the system. The system itself cannot generate more without an external source. Also, in a Zero-Sum game, if you start with X amount (excluding leakage i.e. commissions, etc), and someone takes out .7X, there is only .3X left to be drawn out by others. If two people play this game and both contribute .x and one draws out .x, then there is a loser.
Now, technically speaking, you could really argue that markets are both Zero-Sum and non Zero-Sum. This is because the definition of "winning" is vastly different between the arbiters, speculator and hedger.
If I play a game where people are throwing money into the pot with no intention of wanting to take money out of THAT SAME POT, then there is a net-positive system because other's can take that money.
The future's market, along with other markets, could be considered synergistic in nature when you consider that a speculator can take the money from a hedger without either losing. The speculator is winning because he's fulfilling his specific "win" function by increasing his capital. The hedger, on the other hand, is also winning because he's reducing his risk-profile in other sectors and thereby increasing the value of those other investments.
However, if you take all the little systems and combine them up, you are still left with the total money supply of the national economy. Excluding inflation, if I go to bed with 5 dollars more to my name than I woke up with, someone or a group of people or corporations is missing 5 dollars.
Many people don't view money as just another commodity -- but it is. Money is just convenient because I can walk into 7-11 and buy a slurpee with it because there is an agreed upon value of that currency. I could walk into 7-11 with a gold bar, but then since the gold market isn't as easily understood as the money market, it may be harder to buy things with it.
When you trade, you are merely trading one commodity (money) for another (stock, contracts, options, other commodities). The entire purpose of trading is leaving one risk/reward profile and entering another one with the intention of increasing total net-worth because the other commodity is going to move moreso than the commodity one is trading it for.
U.S. currency is stable and doesn't move much -- it is a low risk/low reward commodity that traders trade every day for other risk/reward profile commodities.
Just add up all the systems involved and you still get the total money supply -- if that money supply increases, then prices will increase because it all goes back to supply and demand (inflation, deflation, etc).
So, technically, everything is zero-sum in that respect. Realistically, since everyone's definition of "win" may be slightly different, synergetic components come into play with markets.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
if a farmer plants a wheat seed and it grows and becomes a wheat crop he has created value
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Futures are Zero Sum... Stocks are not
In futures, there is always an opposing position, so wins by one are offset by losses from another.
Stocks are not zero sum.
1. One can buy a stock at $10, sell at $20. The buyer at $20 can sell it at $30. Both winners, but not necessarily any losers. (Could be viewed as a zero sum transaction of there were short positions on that stock, but not all stock can be shorted + the total of long stock greatly exceeds the total of short stock available.)
2. In an IPO...
a. Say, $20,000 in hard cash is necessary to bring a stock public.
b. The float + insiders = 20 Million shares
b. The underwriters net $20/share on the offerering.
c. The insiders have shares at anywhere from free to $.50 pershare.
d. Out of $20,000 + insider costs, $400 Million in market value is created out of say, $20, 020,000.
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Men are like wine. They start out as grapes, but then it takes a woman to stomp the crap out of them until they're decent enough to have dinner with.
Re: Futures are Zero Sum... Stocks are not
Originally posted by gnome
[B]In futures, there is always an opposing position, so wins by one are offset by losses from another.
Stocks are not zero sum.
1. One can buy a stock at $10, sell at $20. The buyer at $20 can sell it at $30. Both winners, but not necessarily any losers. (Could be viewed as a zero sum transaction of there were short positions on that stock, but not all stock can be shorted + the total of long stock greatly exceeds the total of short stock available.)
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Re: Futures are Zero Sum... Stocks are not
Originally posted by gnome
[B
2. In an IPO...
a. Say, $20,000 in hard cash is necessary to bring a stock public.
b. The float + insiders = 20 Million shares
b. The underwriters net $20/share on the offerering.
c. The insiders have shares at anywhere from free to $.50 pershare.
d. Out of $20,000 + insider costs, $400 Million in market value is created out of say, $20, 020,000.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Re: Re: Futures are Zero Sum... Stocks are not
Originally posted by aphexcoil
Yes, and then someone else can buy it at $40, then $50 -- so everyone keeps making money out of this machine and nobody losses. However, at some point the top is reached and then, when they go to sell the shares they bought at the top, they're going to get less money for it. So, you see there will be losers, although it is harder to see that since there can be a large period of time seperating winners and losers.
the stockmarket not being a ZSG doesn't mean that there are NO losers, only that the total amount of money lost doesn't equal the total amount of money won.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Why Johnny Can't Trade
If you want to understand why Johnny can't trade, just read this Zero Sum Game thread. Johnny wants to complicate everything rather than strip it down to the bear (no pun intended) necessities. Hell, Johnny can't even solve a simple equation or understand the concept of secondary markets!!!
Darkhorse
I must say I am normally not disappointed in your post, but in the Zero Sum Game Thread you really surprised me. Not meaning to be overly critical because I am really glad to see you back and as I have told you many times I really enjoy your posts. But I must say that concerning the "THE STOCK MARKET", which would be the secondary market for equities, it is a simple equation and it does not "SUM" to zero.
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"STRIVE FOR CONTINUED IMPROVEMENT NOT POSTPONED PERFECTION"
I just reread my post from late last night and I left out an important word "not".
At this point we are struggling with definitions.
aphie wants to exclude external factors and says therefore the stockmarket is zero sum. Perhaps it would be under your definition. But I believe your definition is wrong. We need a textbook definition. I think the stock market is not zero sum because there is the potential for external things creating value and then via dividends or thorough growth in assets of the underlying company, the stocks become worth more. Consequently if the secondary market holds to predicted form the price of the stock should go up over time. Consequently you could have no losers and many winners. By the way just because you have the potential for losers you do not get to say it is zero sum.
Again the other talk about value and what causes money to be worth something is what makes economics courses interesting. (I loved reading about how the mercantilist countries hoarded gold and consequently did not have a chance to grow even though they were the best merchants... and I wonder if the U.S. is taking advantage of other countries willingness to be paid in dollars while we grow assets or consume goods... but this is for another thread).
Right now all we need to do is agree on a definition.
Jem,
Good post. I am merely stating that if you view the equities market as an enclosed system, whatever is put in must equal whatever is taken out. Since you mention dividends, the system is no longer enclosed or encapsulated and that changes everything.
However, for the most part, it is closer to being zero-sum than non-zero-sum.
I'm just going to have to respectfully agree to disagree with others who view it differently. I will not reduce myself by taking childish stabs at other people's opinions like Nutsneal.
I'm not going to preach that I'm right -- I'm just going to say that I think a lot of people have different interpretations of what we're talking about and therefore we could all be considered right from some angle.
Regardless of whether or not it is or is not zero-sum, it changes nothing about how to trade it -- this is just an interesting academic discussion that gets occasionally littered by egotistical responses by people like Nutsneal.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Definition
Textbook definition of a zero sum game states that losses and gains to all positions must net out to zero.
Simple Equation
FGL=futures gains on longs
FGS=futures gains on shorts
TFG=total futures gains
SGL=stock gains on longs
SGS=stock gains on shorts
TSG=total stock gains
FGL+FGS=TFG=0
SGL+SGS=TSG=X
X does not equal 0
To be a ZERO SUM GAME the equation must equal 0 at all times.
__________________
"STRIVE FOR CONTINUED IMPROVEMENT NOT POSTPONED PERFECTION"
I am given an apple. Thank you. Having eaten my fill of that apple, I take a seed from the core and plant it.
In time, the seed becomes a tree that produces many apples.
More apples were created from the original apple. The circle does not close.
In the futures and optons market, all circles close. Whether you sell a call and buy it back, or you buy a contract for a carload of cattle and take delivery, there is an end to the process.
In the equities market, there are buyers, sellers, and BORROWERS. If there were no borrowers, ie., short-sellers, then the equities market would be zero sum. MORE STOCK THAN IS ACTUALLY ISSUED IS IN PLAY. This is why the equities markets are not zero sum.
Again, it has nothing to do with the increase or decrease in value of a share of stock, with commissions, with slippage, etc.
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You must be in to win!
Value, Price & Shorts
Originally posted by inandlong
.
In the equities market, there are buyers, sellers, and BORROWERS. If there were no borrowers, ie., short-sellers, then the equities market would be zero sum. MORE STOCK THAN IS ACTUALLY ISSUED IS IN PLAY. This is why the equities markets are not zero sum.
Again, it has nothing to do with the increase or decrease in value of a share of stock, with commissions, with slippage, etc.
__________________
"STRIVE FOR CONTINUED IMPROVEMENT NOT POSTPONED PERFECTION"
To add a little twist to the zero sum game theory; contemplate all of the cross market strategies, i.e. futures against the basket, options against the underlying, futures against the ETFS, etc., ect., etc..
Now is it still a zero sum game ...
The stock market is theoretically zero-sum but functions as non zero-sum. Wealth is created from the perception of value. For example, if the world suddenly sees my dog's toe nail clippings as worth $1000/ounce, where does that money come from? Perception of value. Maybe they cure cancer or something. If someone buys an ounce from me, $1000 goes in my pocket and comes from him. He has now accepted the risk that his perception is correct. Risk = perception.
Now, say it turns out that the scientists were wrong and my dog's toe nail clippings don't cure cancer. The buyer is now out $1000. The wealth transference came from his perception of value vs. mine. It is zero sum.
However, if it turns out the clippings also cure Alzheimer's disease, suddenly they're worth $2000/ounce. Where does this money come from? Perception of value. The constant in here and the reason for wealth creation assumes that people will always be around and always need a cure for cancer and some cheaper cure doesn't come along. This is why the stock market effectively functions as non-zero sum. Those are fairly major structural changes to the system and is the reason people would accept the risk of owning those clippings at $2000.
This is a single instance, but imagine the DOW going to $0. Theoretically possible and would make the game zero sum, but highly unlikely. Most people are willing to risk their money on the perception that the world isn't going to collapse tomorrow and that people will continue to create new products and find new markets.
In the futures market when one loses, another wins, because for every long there is a short. In the stock market there is not a short for every long. If the market goes up, the buyers have taken on risk from the sellers. The buyers didn't physically add the money that created the wealth, it is created when he accepts the risk that his perception is correct. It's possible that his perception is wrong and he will have to repay the wealth he created. The stock market is just a mechanism for the transference of risk. ie. perception. Barring a financial collapse, or a meteor wiping out the human race, the game is effectively not zero-sum.
To say it another way. If I were to buy a share of MSFT at $200, I've accepted the risk that the company is worth that. I've created wealth and don't have to pay for that wealth creation unless I'm wrong. As long as I can find others that agree with that perception and willing to accept the risk, wealth is created.
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There is a difference between knowing the path and walking the path
Neal and Jem:
I am flattered that you expect more of me, high expectations are a compliment of sorts. I can only hope that when I stumble and fall you continue to prefer mercy over schadenfreude.
I will bring it up again since my energy analogy was left unaddressed, and I think it highlights how stockmarket ZSG interpretation is somewhat a frame of reference question:
Is ENERGY a zero sum game?
Yes or No?
Science says yes, yet the promise of technology seems to say no in a practical sense. How are these two observations reconciled?
Do non-guaranteed future inputs count towards the equation? Or do they forever remain in the realm of the potential, since present inputs are the only ones we ever make use of, and thus present in vs out, which matches up, being all that matters?
I also think establishing a text book definition of ZSG is beside the point, or at least beside a deeper point that I wanted to make. (To paraphrase Chili Palmer, I'll be here as long as I want, and I'll make whatever point I want.)
The point that I think is dangerous, regardless of whether it is agreed upon, is that in asking whether the stock market is zero sum, another question is actually hidden underneath: the question of whether something can be gotten for nothing. The question may be posed as a scientific one, sure, and the undercurrent of desire for easy gain may be vehemently denied. But I suspect that some who want to know the answer to this question, on a deeper level want to know whether they can make money trading without having to compete with others, whether their insecurities in regards to going up against veterans can be put to rest because there is enough to go round for all and "everyone can win." If this forced pollyanna mindset does not belong to many of you or even most of you reading this, fine. But the ZSG question has been posed enough times and in enough ways to make me wonder aloud and it's why I posted on the thread. It is to those who see ZSG as a therapeutic observation, and there are many I reckon, that I address this concern.
Misconception at DOW 0
Originally posted by ThoughtfulFog
This is a single instance, but imagine the DOW going to $0. Theoretically possible and would make the game zero sum, but highly unlikely. Most people are willing to risk their money on the perception that the world isn't going to collapse tomorrow and that people will continue to create new products and find new markets.
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"STRIVE FOR CONTINUED IMPROVEMENT NOT POSTPONED PERFECTION"
There is more to life than P/L related in money terms. When you are making real money, every utterance and thought is not about making money.
As you get older 2Good, you will see what I mean.
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You must be in to win!
aphie & Darkhorse
Senior Member
Registered: Jan 2002
Posts: 118
09-10-02 09:11 PM
aphie & Others
quote:
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Originally posted by aphexcoil
It is my job to take the painting as it progresses and determine the style of the current day's painting. Is it a Rembrant, Picasso -- perhaps a Monet? I must then adapt to the market and "be with the market" and place myself in a position to move with the market with absense of fear, hesitation and concern of failure.
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take the painting as it progresses and determine the style of the current day's painting??????????
I must say I find it amazing the trading wisdom I see in the above quote came from a 25 year old with basically no trading experience.
In my opinion, aphie has been asking some very mature, insightful, interesting questions recently. Certainly a refreshing change from the arguments about God, Jesus & 97% proof of the second coming that have taken place in the TRADING FORUM lately.
Questions like color shading for volume in candlesticks?
His questions concerning a perfect moving average etc. and the discussion they have generated I have found interesting and thought provoking.
These are the same type of probing, searching questions Larry Williams was asking in 1982 when I was first introduced to him
(No I'm not implying he was asking me anything. Hell, at that time I barely knew up from down, but I have a friend who has sold some of his ideas to Larry.)
Personally I don't think Larry is the sharpest tack in the box.
In fact he says he is just an old DOS guy that used Genesis and others to convert his stuff to windows. But I do believe Larry is a master at sorting the wheat from the chaff, determining what is important and what is not, and being able to ask the right questions. I see a bit of this raw talent in some of aphie's questions and approach.
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Aphie I made the above post Sept. 10.
It is unfortunate if you thought my earlier post today concerning Why Johnny Can't Trade or solving the simple ZERO SUM equation was directed at you or specifically at anyone else on this board.
I can assure you it was not. Anyone who has followed my posts on this board knows I do not do that.
Darkhorse
I will say again that I do expect a lot more from your posts (even if it is a compliment) than I do from most on this board. You are (IMO) one of the most thought provoking intelligent posters I read. But I must stop before you get a big head.
I would also like to say that I try not to offend others with my posts. But then again once in a while SHIT JUST HAPPENS!!
__________________
"STRIVE FOR CONTINUED IMPROVEMENT NOT POSTPONED PERFECTION"
To me the zero sum question is academic. You should not be in the market if you do not know how to make money in it. And buy and hold is a sales pitch not an edge. So do not worry about me darkhorse the minute I lose my edge I will look for another one. In fact I am looking for one now so I will swing from vine to vine.
Nutsneal,
I appreciate the kind words but why would you post what you posted about Johny not being able to trade simply because he's disagreeing with you about stocks being a Zero-Sum game?
Let's not take it personal!
I'll just say that we can agree to disagree here because we view this as being different.
A lot of people are really making interesting analogies (apple with seeds gives you something for nothing, etc). Again, even an apple is zero-sum. Whether you plant the seeds and spend time managing an apple plant or go to the supermarket to purchase apples because you are paying someone else to do that world for you, it is all simply a transfer of commodity.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Originally posted by aphexcoil
Nutsneal,
A lot of people are really making interesting analogies (apple with seeds gives you something for nothing, etc). Again, even an apple is zero-sum. Whether you plant the seeds and spend time managing an apple plant or go to the supermarket to purchase apples because you are paying someone else to do that world for you, it is all simply a transfer of commodity.
Pabst, now that is funny.
Somebody please close this thread before 2Good has a heart attack.
Surely there is some lawyer out there just waiting for a negligence case whereby an internet board operator allowed so much garbage to be posted that a new participant became so enraged and offended that he suffered a myocardial infarction.
"You know, we would be willing to settle this case with ET for a free T-shirt, 30 days free commish from IB, and a free copy of "You Win with People" written by Don Bright."
No offense Don, just poking fun a little.
__________________
You must be in to win!
heh, i would say the opposite is true: in theory, the creation of value through labor makes the stock market a positive sum game in the long run. however, for us short-term traders, the market is close enough to ZSG in practice.
Originally posted by ThoughtfulFog
The stock market is theoretically zero-sum but functions as non zero-sum.
you're forgetting dividends.
This is a single instance, but imagine the DOW going to $0. Theoretically possible and would make the game zero sum
if you want an analogy from physics, you really should use ENTROPY, not energy, as it can be better associated with value. you see, one can view value as the reverse of entropy: whenever the entropy of an item/system is decreased (through labor), it gains in value. and vice versa: the decay of an item/system causes an increase in entropy and decrease in value.
Originally posted by darkhorse
Is ENERGY a zero sum game?
zero sum game
ZSG
One side's gain may ONLY result from the other side's loss and the net measured outcome will always be 0.
One win = 1
One loss = - 1
net Total = 0
Total = 0 is the zero sum referred to
Stocks are not a zero sum game
Futures are.
stu you psuedo-intellectual dimwit! geez i'm so sick of these people posting there crap on here, trying to sound smart with their fancy "proofs"....
Originally posted by daniel_m
stu you psuedo-intellectual dimwit! geez i'm so sick of these people posting there crap on here, trying to sound smart with their fancy "proofs"....
Like Bob the tomato says in Veggie Tales... "maybe we should read a book."
This thread continues to survive. Stu, don't get sucked into this thread. You have Excel issues, who knows what you might post.
As you know, I'm having troubles remembering the market closes at 4 and not 3.
2Good is offended by pseudo-intellectuals and borders on stroke.
Aphie can't find a date so he is playing a zero fun game.
And all of this has exactly nothing to do with "Trading".
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You must be in to win!
inandlong ,
you're right man, that sum was my input for .Range(A1:B1).Value
Took me 3 weeks work to get that.
I will be more careful in future. Thanks for the heads up
the long term chart of the stock market clearly shows that it is anything but a zero-sum proposition.
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{Speculations}
Originally posted by jem
To me the zero sum question is academic. You should not be in the market if you do not know how to make money in it. And buy and hold is a sales pitch not an edge. So do not worry about me darkhorse the minute I lose my edge I will look for another one. In fact I am looking for one now so I will swing from vine to vine.
Contorting what should be a simple definition into a wordy intellectually academic equivalent to pumping mind iron may well be entertaining but pointless for any clarity, unless perhaps the purpose is to create ambiguity in order to allow one's own opinion to have a value where it may otherwise not be valid.
A definition is no lodger a definition if it is based only upon one's own assumptions. The purpose of a concise explanation of a phrase or word is for a common comprehension so that people may communicate with understanding.
There is a tendency for the intelligentsia of Elite to want to determine how things are and should be. The occasional shallow zeitgeists of this place sometimes come up with some amazingly simple but illuminating insight.
One more thing, if the other side of a trade, or deal MUST lose for you to win, it's a zero sum game.
Originally posted by stu
The occasional shallow zeitgeists of this place sometimes come up with some amazingly simple but illuminating insight.
One more thing, if the other side of a trade, or deal MUST lose for you to win, it's a zero sum game.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Originally posted by stu
Contorting what should be a simple definition into a wordy intellectually academic equivalent to pumping mind iron may well be entertaining but pointless for any clarity, unless perhaps the purpose is to create ambiguity in order to allow one's own opinion to have a value where it may otherwise not be valid.
A definition is no lodger a definition if it is based only upon one's own assumptions. The purpose of a concise explanation of a phrase or word is for a common comprehension so that people may communicate with understanding.
There is a tendency for the intelligentsia of Elite to want to determine how things are and should be. The occasional shallow zeitgeists of this place sometimes come up with some amazingly simple but illuminating insight.
One more thing, if the other side of a trade, or deal MUST lose for you to win, it's a zero sum game.
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Freedom, I have much love for ya!!
Originally posted by aphexcoil
You shouldn't call yourself such derogatory names! Oh, and your example is wrong.
We could both buy/sell at the same time and profit. Think of a basic sinewave. If the transaction occurs as the middle zone and you exit your long position at the crest while I continue to hold until my exit at a trough, we both win at the expense of the people who bought at the crest and sold at the trough.
So, this analogy of two traders exchanging a commodity and one having to lose is rediculous. There is generally another fool somewhere willing to make your trade profitable. If you can't find one, give me a ring (maybe I'll be trading by then).
Originally posted by ElCubano
you can win the other side of the trade and still be net negative......
Originally posted by stu
so what ??
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Freedom, I have much love for ya!!
Originally posted by stu
Contorting what should be a simple definition into a wordy intellectually academic equivalent to pumping mind iron may well be entertaining but pointless for any clarity, unless perhaps the purpose is to create ambiguity in order to allow one's own opinion to have a value where it may otherwise not be valid.
A definition is no lodger a definition if it is based only upon one's own assumptions. The purpose of a concise explanation of a phrase or word is for a common comprehension so that people may communicate with understanding.
There is a tendency for the intelligentsia of Elite to want to determine how things are and should be. The occasional shallow zeitgeists of this place sometimes come up with some amazingly simple but illuminating insight.
One more thing, if the other side of a trade, or deal MUST lose for you to win, it's a zero sum game.
one more time
darkhorse, in typical fashion, is unnecessarily complicating matters. sure everything, at some level, is connected, but in order to be able to succinctly and coherently discuss a certain subject we need to arbritrarily draw the line at some point as to what is relevant, and assume that some things just "are". otherwise we'd have to drag ourselves through a quagmire of epistemology every time we wanted do discuss some topic. in the case of ZSG and the stockmarket, that line is drawn at the dollar value positions (long and short) of the market participants. as the stockmarket is a perpetual entity and there are unequal amounts of longs and shorts, for the purposes of this discussion (not to mention for the purposes of making money) the stock market is not a zero sum game.
Re: one more time
Originally posted by daniel_m
there are unequal amounts of longs and shorts, for the purposes of this discussion (not to mention for the purposes of making money) the stock market is not a zero sum game.
rs7huh ???
what are these guys talking about? I think I agree with all of them ?? its only money
Re: one more time
Originally posted by daniel_m
darkhorse, in typical fashion, is unnecessarily complicating matters.
Originally posted by rs7
Not having the patience to wade through this thread... This is a clear issue. I can't even begin to see where it can be argued... This is simple mathematics.
Triple LOL
LOL = last refuge of defeated position.
oh, no wait. 2nd last refuge. you still have the, what's it called again? the darkhorse multi-variate complexity shield?
Re: Re: one more time
Originally posted by darkhorse
double LOL
rs7
Re: Triple LOL
Originally posted by daniel_m
LOL = last refuge of defeated position.
oh, no wait. 2nd last refuge. you still have the, what's it called again? the darkhorse multi-variate complexity shield?
Re: Re: Triple LOL
Originally posted by darkhorse
Mathematics only complicates the issue if anything- trying to rectify the concepts of zero and infinity can knock out a supercomputer, let alone a human mind. Mathematics shades into philosophy at the margins. But I guess I'm just hiding behind my 'multi-variate complexity shield' once again.
Re: Re: Re: one more time
Originally posted by rs7
OK, a double LOL must mean I am wrong? Dark, my man, am I? All the wealth that disappeared in the stock market ended up somewhere else? It IS an net zero game?
Re: Re: Re: Re: one more time
Originally posted by darkhorse
I was responding to a) your dismissal of my view before reading it and b) the notion that the question is black and white in mathematical terms.
Re: Re: Re: Re: Re: one more time
Originally posted by rs7
I don't understand how you can make more of this than there is. Maybe it is just my simple-mindedness, in which case you will have to give me a pass
not really. zero is the flipside of infinity indeed, but that - more often than not - also means that the complexity of infinity gets "flipped". in fact, in mathematical calculations/theorems, zero is usually a good omen of upcoming simplicity and elegance.
Originally posted by darkhorse
Messing with zero is the flipside of messing with infinity, both of which get hairy pretty quickly.
Originally posted by jaan
in fact, in mathematical calculations/theorems, zero is usually a good omen of upcoming simplicity and elegance.
So instead of trying to bend and twist the definition to fit the game........
defining the understanding of how to define the definition zero sum
Originally posted by darkhorse
And this necessary process- of finding where deeper assumptions are misaligned and then rectifying those misalignments before moving forward- or alternatively agreeing to disagree- is the "overcomplication" that you speak out against. Presuppositions / first assumptions are like the foundations of a building; they have to line up before you can build anything on top of them.
Originally posted by daniel_m
in the case of ZSG and the stockmarket, that line is drawn at the dollar value positions (long and short) of the market participants. as the stockmarket is a perpetual entity and there are unequal amounts of longs and shorts
This debate is a Zero-Sum game.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Holly cow I had no idea this thread would end up being so long.
I do think this was a worthwhile topic though, I do think I got something out of reading it. I guess I will put in my $.02 now.
It has become more and more obvious to me that the stock market cannot be a zero sum game and the most simple example I can think of to show that is growth of the marktet. Yes we have lost money lately but the historical growth in excess of inflation by defination shows that over the long run the market is NOT a zero sum game....
If it were Zero sum we would all be trying to get our share of the money that was in the market in 1920. (adjusted for inflation of course)
Also it seems to me that the increase in the value of the markets and our economy comes from people who labor in exchange for money.
Originally posted by breakin
It has become more and more obvious to me that the stock market cannot be a zero sum game and the most simple example I can think of to show that is growth of the marktet. Yes we have lost money lately but the historical growth in excess of inflation by defination shows that over the long run the market is NOT a zero sum game....
If it were Zero sum we would all be trying to get our share of the money that was in the market in 1920. (adjusted for inflation of course)
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
Originally posted by aphexcoil
This is a good point. If you look at any chart that adjusts the DOW performance to inflation, you will see that markets are growing. One of the reasons for this has to do with production levels and population expansion. As time moves forward and the population increases, you get a larger labor pool and thus a higher gross domestic product.
If you look at the 100 year chart on Dow, it looks like an exponential function up until a few years ago. Now it appears to be resembling a logistics curve (predator / prey growth models in nature). Perhaps even a Guassian curve at some point!
I'm not sure how to account for the increase beyond inflation but I'm sure there is some method to account for this. A simple transfer of commodity (savings into the market) would show an increase in the market, but at some point these people will want their money back.
If this large increase has been the result of the baby boomer generation sticking it in for retirement, you could see the market really deflate as they get older and have to find some way to pay their medical bills.
zero sum game
Ok I'm new to elite trader and I've just plowed through 20 pages of debate on zsg. OK I got a bit bored towards the end, so forgive me if I repeat here something that someone else has already said.
The futures market is a zero sum game, the stock market isn't.
Futures contracts are just bits of paper that we have invented to provide something to trade (ok it's a bit more complicated than that!). Its like a £50 note, the paper it is made out of is worthless, but everyone accepts its value as £50. For every contract there must be a buyer and a seller and when it expires thats the end of it. There was nothing in the beginning and theres nothing at the end, all that has happened is that in the meantime 1000's of people have bought and sold this bit of paper depending on what they think it is worth at the time. Some make a profit, some make a loss but at expiry the total sum of winners and losers is zero.
The stock market is different, the underlying shares represent companies. I know this may come as a shock to some traders but Cisco, Microsoft et al are real. They employ people and resources to create products and provide services. The employment of resources creates value, this value is reflected in the share price. Fundamentally a share is worth the net present value of the future return from that share (dividends). In practice the share price moves all over the place due to speculation but in the long run it will reflect the future value of the company. Eg Worldcom, Enron etc have no future therefore they are worthless.
The stock market is not a zero sum game because the shares have a true underlying value which depends on the future returns from that company. Of course some people will think the future is bright, others will think it stinks, nobody actually knows.
Anyway, hope that makes some sense!
I agree Futures are zero sum Stocks are not
I don't agree with your reason. I don't think it matters whether Microsoft (used as an example) creates wealth or employs people for the definition of zero sum.
The point is that the shares created by Microsoft when taken up by a trader will not cost Microsoft loss if they go up or down. In fact Microsoft 'win' when they dispose of them. Therefore zero sum cannot apply. Once Microsoft have got rid of their shares in theory everyone could always win when they traded them on. The stock could always rise. Even if the stock declines over time and returns to zero that's not the definition for zero sum. The definition is the other side of the trade MUST lose (not could lose) for the other to win and vice versa.
In a Futures contract to trade, it will cost the seller if the buyer wins and it will cost the buyer if the seller wins
Possibly for the sake of the zero sum game argument it doesn't matter what Microsoft does with the cash it raised from selling shares. I was just trying to define a difference between futures and stocks.
In theory everyone should win with stock, as the company raises cash from the issue and the investors obtain a return on their investment in the form of divi's. The customers of the company are receiving a product or service that they want, so everyone is happy!
I think the confussion on this board has arisen because traders use stock for short term speculation and get used to winning some and losing some, much like they would with a futures contract and lose sight of the longer term objective of holding stocks as an investment.
Its like a £50 note, the paper it is made out of is worthless, but everyone accepts its value as £50.
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aphie
He said, "Oh, there won't be any money, however, when you die on your deathbed, you will receive total consciousness. So I've got that going for me ... which is nice."
I guess you could say the same thing about money, stock certificates, bonds, checks or anything else that is just a piece of paper but everyone accepts has value!! How are futures contracts any different?
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