Trading is a zero sum game

Discussion in 'Trading' started by breakin, Oct 11, 2002.

  1. 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----
  2. 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.
  3. Atlantic


    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.
  4. MUChris


    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!

  5. JORGE


    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.
  6. 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.
  7. 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.
  8. ElCubano


    I think your company example is incorrect.......the loss is offset by the gain to the Company and/or The Insiders which sold the investors the 1000 shares.......

    commissions = not a true zero-sum game...
  9. 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.
  10. DT-waw


    Well said. If futures markets won't be used to hedge, they will be the world's largest online casino! :D
    Great article about zero-sum game:
    #10     Oct 11, 2002