How is the stock market NOT zero-sum?

[Tickner]

I am taking an intro to finance course and we haven't touched on this subject. I am a complete n00b to investing so just wondering if someone can give me a quick answer to this. I have always thought that if someone makes money that someone else must have lost it. Perhaps I play too much poker.

Thanks!

[Uglyowl]

Companies are making money, if you are an investor you are reaping some of it. Maybe zero sum if you factor in company and consumer.

[Jordan]

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

[Tickner]

Just because the wealth of the world is increasing im not 100% sure how that applies to stock holders.

ok, so is it because of dividend payments?

[Borodog]

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.

[jae686]

The value of a stock is the present value of all expected future dividends.

Profit generates dividends.

Businesses do not stay active in the long run unless they believe they will generate profit.

The "sum" of the stark market mimics, the sum of all profits in the market, which we have reason to believe is greater than zero.

Also, to respond to the first comment...it is one of the most tragic fallacies of economics to claim that trade is zero sum. Both parties can certainly benefit from trade, and this is typically the case when each chooses to act as he wishes.

[Borodog]

Another point:

If everyone were buying and selling stocks for the same reasons, say that they believe they would either go up or down in the next day, then clearly they must make opposite speculations, and one of them must be wrong. Hence, one guy will lose money.

But that isn't why everyone buys stocks; people have different time horizons over which they make guesses. Lets say that you believe a stock will go down tomorrow and sell it to me today, and I buy it because I believe it will go up in ten years. Clearly, both of us can be right in that case.

I'm totally shooting from the hip here, BTW.

[jae686]

Short answer: The value of each asset being traded (the corporations) in ways that have no necessary opposite effect on other companies.

[T50_Omaha8]

Let's simplify the stock market, and pretend that two people are in isolation. Person A has a share of stock, and person B doesn't. Person B happens to know that the true value of the stock is $15. Person A isn't sure, but doesn't think the true value of the stock is more than $10.

Person A buys it from person B and loses 5 theoetical expected dollars. Person B gains 5 theoretical expected dollars.

Isn't the stock market just a more complex version of this game with more actors?

[jae686]

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.