How is the stock market NOT zero-sum?

[DcifrThs]

there is a very wide variety of responses here. i'll chime in with what i've learned.

it is very simple: for you to buy and hold a stock, it must offer a return above the "risk free rate," otherwise you'd just hold treasuries. this extra return can be called a risk premium since you must be compensated for the extra risk you take on by holding stocks instead of treasuries (which i've assumed here are risk free).

therefore, stocks must increase over the logn run by more than the adjusted rate of default (which would make their EV the same as treasuries) in order for investors to hold them.

this risk premium is "transferred" from the issuers of shares since they are the ones on the line to make the ivnestment attractive to shareholders.

Barron

[T50_Omaha8]

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The TRADING of stocks is zero-sum, but we're missing the point here.

The true value of the market grows over time because corporations profit. Trading is just the process of splitting up those profits.

[/ QUOTE ]But this will happen regardless of how the game is played.

In other words, this would imply the stock market IS a fixed sum game, but the sum is fixed to some value unknown in the present.

[ahnuld]

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not zero sum because total wealth in the world is increasing.

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due to tech advances productivity increase meaning more from less. Not zero sum

[Badger]

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Abstract point:

Imagine you have a Picasso. You bought it from a guy for $2M. He bought it for $1M. You certainly "lost money", but have the asset. You sell it to a guy for $3M, making $1M. He sells it to a guy for $4M. Etc.

You can argue that eventually someone is going to pay the piper when the painting falls apart or gets burned in a fire or something, but clearly just buying and selling an asset can be done indefinitely with nobody losing any money.

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OK, so this example sounds like zero sum to me, but now let's say that you can make money by showing this painting off, it's no longer zero sum due to the profits that come in.

[Mark1808]

Futures & options are a zero sum game because their is a fixed maturity and all positions must be closed out. This means every original buyer must eventually sell and every original seller must eventually buy. The net effect for all participants will be zero as every winner is balanced out by a loser.

The stock market has no fixed end point and the value of all shares can either rise or fall without their having to be a loser for every winner. Lets take a company with a million shares outstanding at $10. If 100 shares trade at $11 then the holders of 999,900 shares are a $1 per share richer without their being an offsetting loss. The same is true of the real estate market.

[Alex-db]

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The TRADING of stocks is zero-sum, but we're missing the point here.

The true value of the market grows over time because corporations profit. Trading is just the process of splitting up those profits.

[/ QUOTE ]But this will happen regardless of how the game is played.

In other words, this would imply the stock market IS a fixed sum game, but the sum is fixed to some value unknown in the present.

[/ QUOTE ]

Perhaps its ok to say that TRADING stocks is a zero-sum activity surrounding the non-zero-sum activity of HOLDING stocks?

[T50_Omaha8]

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[ QUOTE ]
The TRADING of stocks is zero-sum, but we're missing the point here.

The true value of the market grows over time because corporations profit. Trading is just the process of splitting up those profits.

[/ QUOTE ]But this will happen regardless of how the game is played.

In other words, this would imply the stock market IS a fixed sum game, but the sum is fixed to some value unknown in the present.

[/ QUOTE ]

Perhaps its ok to say that TRADING stocks is a zero-sum activity surrounding the non-zero-sum activity of HOLDING stocks?

[/ QUOTE ]Okay, I've admitted that holding stocks is not really zero sum.

I haven't heard any evidence that it is not a CONSTANT or fixed sum game, however, which is the same general idea as a zero sum game: that all gains come from the expense of another. (I know this is theoretically not true, as even small value trades supposdly affect market prices of stocks, but this is so minute it can be disregarded for most investors.)

Does anyone have any stronger evidence that the stock market is not a constant sum game?

[Tickner]

Alright so what I've gathered here is that since stocks are assets, and these assets increase in value, you can buy a stock and have your "asset wealth" increase without anyone actually losing money. I agree that this is not zero sum because nobody lost anything, they simply view me as more wealthy than before.

Once the trade is made, if I sell my new asset to B, then I gain the net. B did not lose anything though, because he paid me the present value of that stock and so his "Asset Wealth" did not decrease from buying it, even though mine increased from HOLDING it.

Thanks guys I think I get it [img]/images/graemlins/smile.gif[/img]

[DcifrThs]

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The TRADING of stocks is zero-sum, but we're missing the point here.

The true value of the market grows over time because corporations profit. Trading is just the process of splitting up those profits.

[/ QUOTE ]But this will happen regardless of how the game is played.

In other words, this would imply the stock market IS a fixed sum game, but the sum is fixed to some value unknown in the present.

[/ QUOTE ]

Perhaps its ok to say that TRADING stocks is a zero-sum activity surrounding the non-zero-sum activity of HOLDING stocks?

[/ QUOTE ]Okay, I've admitted that holding stocks is not really zero sum.

I haven't heard any evidence that it is not a CONSTANT or fixed sum game, however, which is the same general idea as a zero sum game: that all gains come from the expense of another. (I know this is theoretically not true, as even small value trades supposdly affect market prices of stocks, but this is so minute it can be disregarded for most investors.)

Does anyone have any stronger evidence that the stock market is not a constant sum game?

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from wikipedia:

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. Zero-sum can be thought of more generally as constant sum where the benefits and losses to all players sum to the same value

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Many economic situations are not zero-sum, since valuable goods and services can be created, destroyed, or badly allocated, and any of these will create a net gain or loss. Assuming the counterparties are acting rationally, any commercial exchange is a non-zero-sum activity, because each party must consider the goods s/he is receiving as being at least fractionally more valuable to him/her than the goods he/she is delivering. Economic exchanges must benefit both parties enough above the zero-sum such that each party can overcome his or her transaction costs.


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a few examples in terms of the stock market:

- an increase in productivity (all else equal) drives down current and future input costs, increases margins, andincreases the value of stocks whose productivity increased.

- a new product is released which benefits those who want to buy it and thus provides a revenue stream for the company (think google, MSFT, kraft, miller etc.)

- a new market opens up where new wealth is tapped for the benefit fo companies and shareholders (growth of emerging markets etc.)

that can be extended many ways and basically the overall value of the stock market (i.e. one measure in terms of market capitalization...even market cap divided by the total # of stocks to take into account more issuers than previously) is virtually constantly increasing. i don't think buying and holding is anywhere remotely close to a zero or constant sum game. not by a mile.

Barron

[Riverman]

[ QUOTE ]
there is a very wide variety of responses here. i'll chime in with what i've learned.

it is very simple: for you to buy and hold a stock, it must offer a return above the "risk free rate," otherwise you'd just hold treasuries. this extra return can be called a risk premium since you must be compensated for the extra risk you take on by holding stocks instead of treasuries (which i've assumed here are risk free).

therefore, stocks must increase over the logn run by more than the adjusted rate of default (which would make their EV the same as treasuries) in order for investors to hold them.

this risk premium is "transferred" from the issuers of shares since they are the ones on the line to make the ivnestment attractive to shareholders.

Barron

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Great post, thread over.