"You have yet to show me how wealth is created in the stock market. Just because a stock gaps up 10% overnight does not mean that all 100 million shares outstanding can be sold at that time for that price for a 10% gain." nor is that a requirement for a non-zero sum system in a non-zero sum system, there would have to be an equal # of shorts to match the longs even PAPER gains come out to zero in a zero sum system if the futures gap (well, they don't gap much cause they are close to 24 hrs, but bear with me) 50 points, there is an EXACT paper (non-realized) loss to match thenon-realized gain they don't in a non-zero sum system also, just because all the shares could not be sold for that price is irrelevant again, i am explaining economics to a non-sentient being
also, ALL asset classes will change worth based on realizations. if everybody who owns bullion ALL decided to sell tomorrow, gold prices would drop it doesn't therefore follow that if the price of bullion has gone up over the last 3 years, that none of the wealth gained is "real" if everybody in the USA decided to simultaneously sell their house (to move into a tent in botswana) it does not follow that they didn't gain wealth over the last 5 years when their houses appreciated whether wealth is realized or nonrealized is irrelevant also, wealth can be realized in many different instruments the value of a dollar bill changes from day to day, and so does a stock again, these are elementary economic concepts but far beyond volente
This is not about zero sum, this is about how wealth is created in a stock market. Something you still don't comprehend. Answer the question, where does the money come from that magically creates the wealth in the stock market ?
Ok I have two apples u have two oranges, I prefer one apple and one oranges u do the same so we trade. We both benefit from the trade. No real wealth is created, but our utility is higher since we both subjectively value what we have now more than what we had. This situation is supposed to be non-zero-sum according to wikipedia. Situations where participants can all gain or suffer together, such as a country with an excess of bananas trading with another country for their excess of apples, where both benefit from the transaction, are referred to as non-zero-sum(Wikipedia). The futures market is zero sum because the money one gain another lose. But why is the subjective value someone could get from hedging discarded in the futures market case making it zero sum, when it is the same subjective value gain that makes the apple/orange trade not zero sum?? What about the market for lending and borrowing. Is that zero sum? Obviously what the lenders earn in inntrests the borrowers have to pay. Zero sum! But the lenders would not lend and the borrowers would not borrow if they did not gain something from the transaction. Non-zero-sum!
whitster, Does the fact that contracts in futures expire have something to do with futures being a zero sum? The same would be with poker. Each game expires and is settled and in order to change the sum of money involved, the new game has to be open. Does this fact of expiration make futures zero sum or it is the result of zero sum? How is it different from the stock market? It looks that the stock market is a pool of all the stocks with never ending transactions and that makes it non zero sum somehow.
"Does the fact that contracts in futures expire have something to do with futures being a zero sum? " no. that's irrelevant to the fact that it is zero sum. but good question. "The same would be with poker. Each game expires and is settled and in order to change the sum of money involved, the new game has to be open. Does this fact of expiration make futures zero sum or it is the result of zero sum?" no. it's irrelevant. a 24 hr poker game in a casino (eliminating the issue of rake of course) is zero sum even if it is open 24/7 365. this is actually a very good question though. "How is it different from the stock market? It looks that the stock market is a pool of all the stocks with never ending transactions and that makes it non zero sum somehow." no, the difference is in the structure of the system. you have to remember that stocks represent a THING. a portion of a company. let's simplify. let's make a market of ONE stock. cause that would still be non-zero sum. and a market of ONE futures contract. that would be zero-sum. Company ABCD has an IPO. their shares sell at various levels, and they issue 1,000 shares. closing price today is $100 per share. what is the market capitalization? 100,000 dollars. now, this is not a zero sum system. the stock can go up or down. some people win, some lose. it may result in more wealth over time or less, but it will not be zero sum. wealth can be represented in all sorts of markets. real estate. stock. gold. apples. corn, etc. clearly, the whale oil market lost TONS of wealth - when we stopped using whale oil. if ABCD company cures cancer, the stock could go to $1,000 a share. now, what is the market cap? 100,000 dollars. UNLIKE a futures system, there can be more dollars "won" in the market than lost. (this market of one stock). lets' say the stock went from 100 to 1,000 pretty fast, but some people got out at 200, 300, 400, etc. they realized various profits. some might have tried to sell short at 600 and lost some money, etc. but the amount of wealth in the market is not FIXED whether or not the wealth is REALIZED by everybody selling the stock at once, is irrelevant. my wealth in my house is REAL. just because i haven't sold it doesn't make it imaginary. otoh, it could go down or up, but it still EXISTS at the fair market value for my house on any given day. the stock market is different because it is a strict price discovery mechanism for exact things. i can know EXACTLY what the best price I can get for 100 shares of ABCD is RIGHT NOW. it is the bid. period. the current price can change. wealth, as measured by VALUE is more contentious, but when measured by PRICE is whatever the current last (bid/ask) is. clearly a company that just cured cancer is worth more than it was worth the day before when it just had a drug in phase I. each share is a PIECE of the company. it is literally a PERCENTAGE of everything that company is - income, liabilities, real estate, etc. etc. etc. many genius stock pickers (e.g. buffett) realize nice gains by recognizing when a stocks PRICE is far below its real VALUE,like when he bot disney at s discount to its value because he recongized the poorly accounted vast wealth it had in its movie archives. wealth is more than just dollar bills. it is stock, gold, real estate, bullion, groceries, etc. now, the futures market is different a company does nto issue "futures" contracts of its stock (even though there are futures of certain stocks) futures contracts are created out of thin air. all a futures contract is , is an agreement. if i buy dec YM at 12030, I am long one CONTRACT. it is an agreement. somebody else must have an opposite POSITION to my "long agreement" and be short. this is NOT true in the stock market. if ABCD gaps overnight from 50 to 10,000 a share, every single long has gained wealth. the shorts (and assuming the stock has shorts, the shorts will still not exactly equal the longs, nor could they, since a brokerage has to have a share available in its pool to short (naked shorting aside, which gets even more complex)) if my futures contract goes up to 12080, EVERY SINGLE PERSON WHO GAINS $250 ($5 per YM point) is opposed by a person who was short YM and LOSES $250. period. it has to be that way. all a futures contract is one side of an agreement. it is not a THING in itself. consider real estate. if i buy a house, and the housing market becomes movre valuable in my area because its now really desirable, there is NOT a corresponding position that LOSES value equally to offset my gain. but if i buy an OPTION to purchase House X at $500,000 somebody had sell me that OPTION. he has the opposing position. the person that sold me the house otoh, is not SHORT 1 house. our economy builds wealth. innovation, efficiencies, etc. stocks are merely pieces of companies within our economy. it can see similar wealth built a zero sum market cannot because nobody can enter a trade without a countervailing opposite position
Money makes it so confusing to understand why the stock market is non zero sum. In the economy at a given time there is this amount of physical property. XX shares represents all the physical property. Letâs imagine there is a big poker game where shares are the poker money. In this game what the players really win or lose is physical property. While the poker players play labor is being used to create more property from the property that already exists. So even though itâs still only XX shares on the table the poker players play for more and more physical property since more physical property is attached to each share, making this game non zero sum.
And this THING is a CONTRACT Common Stock Evidence of participation in the ownership of a corporation that takes the form of printed certificates. Each share of common stock constitutes a CONTRACT between the shareholder and the corporation. The owner of a share of common stock is ordinarily entitled to participate in and to vote at stockholders' meetings. He or she participates in the profits through the receipt of dividends after the payment of dividends on preferred stock.
whitster, So, only when we trade real things like stocks or houses wealth can be created or lost and we have a non zero sum, but when we trade agreements without the actual transfer of the real thing wealth cannot be created and we have a zero sum? Agreements then have their own price independent of the real thing, so it means that in futures we trade agreements about the underlying issue, not the underlying issue. So, if I have somebody's agreement, then this somebody does not have this agreement and that makes him short and on the opposite side of my position?