aphie, i'm not sure which part of the following sentence you don't grasp: 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.
Daniel, I'm not trying to be stubborn here -- I'm just trying to see your point of view. The total amount of money lost plus the total amount of money won should equal 0 excluding commission costs. If [MONEY PUT IN - MONEY TAKEN OUT <> 0] then that means ... MONEY PUT IN = X MONEY TAKEN OUT = Y [X - Y] + Z = 0 What the hell is Z? Again, I'm just trying to understand where this "extra" money is coming from.
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.
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.
Textbook definition of a zero sum game states that losses and gains to all positions must net out to zero.
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.
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.
The only way the stock market would be a zero sum game (ever) would be if there was an equal short for every long, as there is in the futures markets. I guess I should have included two other things in the equations above. FGL=(FGS)*(-1) SGL<>SGS It has nothing to do with value. It has every thing to do with price.
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 ...