Is the Market Like Sports Betting

[housenuts]

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If everyone bought 1 share of every stock in the entire stock market, everybody could end up with more money than they started with.

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isn't this like a pyramid scheme? the people who buy first get rich, but the last people to buy won't.

[Henry17]

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If everyone bought 1 share of every stock in the entire stock market, everybody could end up with more money than they started with.

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isn't this like a pyramid scheme? the people who buy first get rich, but the last people to buy won't.

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Is this a serious question?

[Badger]

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If everyone bought 1 share of every stock in the entire stock market, everybody could end up with more money than they started with.

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isn't this like a pyramid scheme? the people who buy first get rich, but the last people to buy won't.

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Not as I see it. Let's simplify the market to one company that is worth $1 to start. 100 people buy in for a penny each. Time goes on, this company grows, increases revenue, profits and capital.

Let's say these hundred shares are now going for a dollar a piece and everyone decides to sell off. Before the sell off the stock is worth $100. The stock price starts to plummet. Since this company grew it's doing business more profitably and it's underlying assets have to be worth something more than a dollar. Things like inventory, office supplies, manufacturing equipment, money in the bank and sales revenue coming in give this stock some definite value that will be worth more than a dollar.

Obviously this model fails if the company fails, but overall the trend is that companies grow and do more business.

[Phone Booth]

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Like in sports betting someone wins and someone loses. In stocks, companies grow... Like buying a a total market index you'll come out ahead in the long run, betting every game you won't.

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None of that answers the question of whether the stock market is a zero-sum game. It's not a zero-sum game only if change in ownership has a material impact on business prospects (as in shares are worth more when one person owns them as opposed to another).

To the extent that I'm trading shares with someone else who has absolutely no plan on doing anything with the shares other than selling them for a gain or taking dividends, it's a zero sum game. If you made an economic profit from buying the shares, someone lost that exact profit selling you the shares and taking cash. Whether markets go up or down in the long run is immaterial.

[Badger]

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Like in sports betting someone wins and someone loses. In stocks, companies grow... Like buying a a total market index you'll come out ahead in the long run, betting every game you won't.

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To the extent that I'm trading shares with someone else who has absolutely no plan on doing anything with the shares other than selling them for a gain or taking dividends, it's a zero sum game. If you made an economic profit from buying the shares, someone lost that exact profit selling you the shares and taking cash. Whether markets go up or down in the long run is immaterial.

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Nobody lost profit by selling shares that went up. Yes they would have made more if they held on to them, but they didn't actually lose anything by selling.

I believe that in a sense it is immaterial if markets go up or down. However, that's only if the market going up is being driven by supply and demand of the stock available for the company. The market's underlying assets, companies, generally appreciate in value.

To draw a poker analogy from the player's perspective:
Raked poker is negative sum game. As a group the players lose.
Rake free poker is a zero sum game. The group doesn't win, but individuals do only to the extent that others lose.
Rake free poker where a non player adds to the pot. There will still be winners and losers, but as a whole the group wins. I think that this analogy (although the least common in poker) best represents the stock market.

[SlowHabit]

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Like in sports betting someone wins and someone loses. In stocks, companies grow... Like buying a a total market index you'll come out ahead in the long run, betting every game you won't.

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None of that answers the question of whether the stock market is a zero-sum game. It's not a zero-sum game only if change in ownership has a material impact on business prospects (as in shares are worth more when one person owns them as opposed to another).

To the extent that I'm trading shares with someone else who has absolutely no plan on doing anything with the shares other than selling them for a gain or taking dividends, it's a zero sum game. If you made an economic profit from buying the shares, someone lost that exact profit selling you the shares and taking cash. Whether markets go up or down in the long run is immaterial.

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AAPL had its IPO last month at $100/share. I bought one share of AAPL for $100. I sold it to Joe last week at $110/share and made a profit of $10 for my investment. Now AAPL is worth $150. Joe has not sale his position and we don't know whether he will or not in the future. Yet it's a zero-sum game because I lost moneys in potential profits?

[Phone Booth]

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Nobody lost profit by selling shares that went up. Yes they would have made more if they held on to them, but they didn't actually lose anything by selling.


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Sure they did. They exchanged one asset (stock) for another (currency). One of those two assets will definitely outperform the other. It all depends on what you use as a measuring stick. By your definition, no one ever loses anything.


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I believe that in a sense it is immaterial if markets go up or down. However, that's only if the market going up is being driven by supply and demand of the stock available for the company. The market's underlying assets, companies, generally appreciate in value.


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Except, of course when they don't.

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To draw a poker analogy from the player's perspective:
Raked poker is negative sum game. As a group the players lose.
Rake free poker is a zero sum game. The group doesn't win, but individuals do only to the extent that others lose.
Rake free poker where a non player adds to the pot. There will still be winners and losers, but as a whole the group wins. I think that this analogy (although the least common in poker) best represents the stock market.

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All three games are considered zero-sum games by game theorists, unless their behavior changes the amount either given to or donated by third parties.

Note that there's no angel that adds money to the stock market either. There are many that do take money out. Either assets are properly priced or they are not. If they are priced to include all future growth prospects, you shouldn't make any economic profit beyond the ordinary cost of capital. If they aren't, whoever is selling you is giving up EV.

Of course this is a gross simplification - M&A, PE and shareholder activism complicate the picture. But to think that taking market risk is some sort of free lunch is extremely naive.

[Badger]

PB, I had a long response written up but I bailed on that because I'd like to keep it simple.

Someone losing potential profits that someone else captures does not mean it's a zero sum game. The average expectation for all players must be zero for this to be the case, and it's not the case with the stock market.

[SuperWhale]

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Sure they did. They exchanged one asset (stock) for another (currency). One of those two assets will definitely outperform the other. It all depends on what you use as a measuring stick. By your definition, no one ever loses anything.



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So you are arguing that opportunity cost should be taken into account when considering if the market is a zero-sum game.

[DcifrThs]

i wonder if the market is like the oatmeal i eat for breakfast.

sometimes it is smooth like when i add too much soymilk, and other times it is slow like when i add peanut butter.

Barron