The stock market is theoretically zero-sum but functions as non zero-sum. Wealth is created from the perception of value. For example, if the world suddenly sees my dog's toe nail clippings as worth $1000/ounce, where does that money come from? Perception of value. Maybe they cure cancer or something. If someone buys an ounce from me, $1000 goes in my pocket and comes from him. He has now accepted the risk that his perception is correct. Risk = perception.
Now, say it turns out that the scientists were wrong and my dog's toe nail clippings don't cure cancer. The buyer is now out $1000. The wealth transference came from his perception of value vs. mine. It is zero sum.
However, if it turns out the clippings also cure Alzheimer's disease, suddenly they're worth $2000/ounce. Where does this money come from? Perception of value. The constant in here and the reason for wealth creation assumes that people will always be around and always need a cure for cancer and some cheaper cure doesn't come along. This is why the stock market effectively functions as non-zero sum. Those are fairly major structural changes to the system and is the reason people would accept the risk of owning those clippings at $2000.
This is a single instance, but imagine the DOW going to $0. Theoretically possible and would make the game zero sum, but highly unlikely. Most people are willing to risk their money on the perception that the world isn't going to collapse tomorrow and that people will continue to create new products and find new markets.
In the futures market when one loses, another wins, because for every long there is a short. In the stock market there is not a short for every long. If the market goes up, the buyers have taken on risk from the sellers. The buyers didn't physically add the money that created the wealth, it is created when he accepts the risk that his perception is correct. It's possible that his perception is wrong and he will have to repay the wealth he created. The stock market is just a mechanism for the transference of risk. ie. perception. Barring a financial collapse, or a meteor wiping out the human race, the game is effectively not zero-sum.
To say it another way. If I were to buy a share of MSFT at $200, I've accepted the risk that the company is worth that. I've created wealth and don't have to pay for that wealth creation unless I'm wrong. As long as I can find others that agree with that perception and willing to accept the risk, wealth is created.
Now, say it turns out that the scientists were wrong and my dog's toe nail clippings don't cure cancer. The buyer is now out $1000. The wealth transference came from his perception of value vs. mine. It is zero sum.
However, if it turns out the clippings also cure Alzheimer's disease, suddenly they're worth $2000/ounce. Where does this money come from? Perception of value. The constant in here and the reason for wealth creation assumes that people will always be around and always need a cure for cancer and some cheaper cure doesn't come along. This is why the stock market effectively functions as non-zero sum. Those are fairly major structural changes to the system and is the reason people would accept the risk of owning those clippings at $2000.
This is a single instance, but imagine the DOW going to $0. Theoretically possible and would make the game zero sum, but highly unlikely. Most people are willing to risk their money on the perception that the world isn't going to collapse tomorrow and that people will continue to create new products and find new markets.
In the futures market when one loses, another wins, because for every long there is a short. In the stock market there is not a short for every long. If the market goes up, the buyers have taken on risk from the sellers. The buyers didn't physically add the money that created the wealth, it is created when he accepts the risk that his perception is correct. It's possible that his perception is wrong and he will have to repay the wealth he created. The stock market is just a mechanism for the transference of risk. ie. perception. Barring a financial collapse, or a meteor wiping out the human race, the game is effectively not zero-sum.
To say it another way. If I were to buy a share of MSFT at $200, I've accepted the risk that the company is worth that. I've created wealth and don't have to pay for that wealth creation unless I'm wrong. As long as I can find others that agree with that perception and willing to accept the risk, wealth is created.
