Haven't found this discussion. Mostly fragmented whenever it comes up. A zero sum game is where one's gain is another's loss. There are many markets for many instruments. Stocks. options, futures, forex, etc. There are many time frames, a few microseconds, an hour, a day, weeks, years, decades, etc. It should be mentioned, the conventional wisdom is derivatives with expiration dates and cash settled often considered zero sum while equities are not. So, in your opinion, is trading/investing a zero sum game? And why? How does the fiat system of currency play into this? Discuss away.
IMO our existence and everything in it is part of a zero sum game. e=mc^2 Matter and energy are only transferred , not created or destroyed. Some argue that futures are zero sum or even negative sum if you count comish while stocks aren't as directly zero sum. I think all value in the end is zero sum. It's either your gain or your cost/opportunity cost. Z
I agree. The conventional wisdom is derivatives trading are zero sum, but many will then stress equities are not zero sum because 'companies grow' and this is then used as an argument for the holy grail of "long term investing". My take is the economy as a whole at any point in time is zero sum. The money supply at a fixed snap shot is fixed. But over time the economy's money supply grows due to money printing as its a fiat currency. But the stock market 'is not zero sum' only for the reason that money is redirected from the economy and into the stock market via money flow and payment of dividends (from money that companies scourge from the economy) that are distributed to its shareholders. But its just a redistribution of money. So while looking at only the stock market, it does appear to be non-zero sum, the economy as a whole is very much zero sum. All we are doing is redistributing money from on place to another and aggregating it to a segment of the populus (the shareholders). The reason why central banks love fiat currency is because it can grow the money supply. So we can continue to drink the koolaid. You see, companies make money, and they borrow money, and they pay shareholders. The stock market also sees continued money inflow from continued investments to cause multiples expansion. All this creates the elusion of wealth generation, when it is merely wealth aggregation with continued money printing by central banks to increase the money supply at a later date. Wealth creation is a facade Companies that "grow" are simply money aggregators and "wealth generation" is simply the market's way of prioritizing economic wealth distribution to efficient enterprises. The stock market, while during bull markets and with a robust growing economy, appears not to be zero sum, the economy is zero sum for the simple fact money supply is fixed. This is the only reason why you can say that buying a quality company now, you can sell to another buyer at a later date, and that buyer later becoming the seller, and still not leave anyone being net losers. Its because of dividends and money inflow into the stock market. If that were not true, and companies paid no dividends and the number of market participants were fixed with fixed pool of capital, then the stock market then becomes zero sum. Essentially, central banks create more money over time. There is net inflow of capital into the stock market where it ultimately aggregates like a sink. The rich gets richer and amasses more and more of that supply of money. The rich don't spend nearly as much money as they collect. And the central banks keep printing more and more leaving the transacting money supply used in the economy being relatively constant. But essentially, it just leads to a greater rich-poor divide with the rich simply getting richer and richer and they can't help it too. Thats just how the economy works.
All nuances aside, the act of buying requires a seller, the act of selling requires a buyer. By definition a trade is a zero sum exercise when considering both parties. Keep it simple!
A transaction is always negative-sum ... the asset is transferred from the seller to the buyer, and commissions/fees are extracted by the exchange & broker.
In the financial world yes, in physical trading, not necessarily. The concept of economic utility blurs the subject a little. But in the financial world, the opportunity cost is zero sum. Even when dealing with cross product trading. For example, I bought bonds to hedge my long stock exposure. Some could argue that my long bonds might lose money but that's OK because I made money in my stocks. But I would have made MORE money had I not hedged my position.
A single transaction tells you nothing, it is merely half a trade. Assuming that both transactions are exits, you might have two winners, two losers or one winner and one loser. You can have two winners or two losers because the person opposite you in the exit is almost never the same person who was opposite you in the entry. The only sure winners in any transaction are your broker and your opposite's broker. So the flawed assumption here is that only two parties are involved in a trade when at least three and typically more are involved in every trade. Stop discounting the brokers.
Trading and investing are two completely different things. Investing relies on pool of money outside of capital markets and is function of what capital investment can return from real economy. Reinvested profits and inflation can add to the pool of capital available to exchange for capital property but in the end that pool is constant relative to valuation of capital assets. Capital property is exchanged for cash equivalent in the process of trading. Therefore trading is zero sum game.
On the microstructure level, trading is zero sum. On the macro level, the whole "trading industry" is positive sum. It allows for more effective risk transference and liquidity that causes assets to price lower risk.
The equity market is not a zero-sum game. You buy a stock at $10 and sell it to John at $11. You made a profit. John sells it to Paul at $12. John made a profit. Paul sells it to Alice at $13 or 14, and so forth... Paul made a profit. Of course only the last unfortunate buyer is left with the "hot potato" and will experience a loss when the music stops.