Trading is a zero sum game

[aphexcoil]

Originally posted by breakin
:eek:


It has become more and more obvious to me that the stock market cannot be a zero sum game and the most simple example I can think of to show that is growth of the marktet. Yes we have lost money lately but the historical growth in excess of inflation by defination shows that over the long run the market is NOT a zero sum game....

If it were Zero sum we would all be trying to get our share of the money that was in the market in 1920. (adjusted for inflation of course)

This is a good point. If you look at any chart that adjusts the DOW performance to inflation, you will see that markets are growing. One of the reasons for this has to do with production levels and population expansion. As time moves forward and the population increases, you get a larger labor pool and thus a higher gross domestic product.

If you look at the 100 year chart on Dow, it looks like an exponential function up until a few years ago. Now it appears to be resembling a logistics curve (predator / prey growth models in nature). Perhaps even a Guassian curve at some point!

I'm not sure how to account for the increase beyond inflation but I'm sure there is some method to account for this. A simple transfer of commodity (savings into the market) would show an increase in the market, but at some point these people will want their money back.

If this large increase has been the result of the baby boomer generation sticking it in for retirement, you could see the market really deflate as they get older and have to find some way to pay their medical bills.

 

[stu]

Originally posted by aphexcoil


This is a good point. If you look at any chart that adjusts the DOW performance to inflation, you will see that markets are growing. One of the reasons for this has to do with production levels and population expansion. As time moves forward and the population increases, you get a larger labor pool and thus a higher gross domestic product.

If you look at the 100 year chart on Dow, it looks like an exponential function up until a few years ago. Now it appears to be resembling a logistics curve (predator / prey growth models in nature). Perhaps even a Guassian curve at some point!

I'm not sure how to account for the increase beyond inflation but I'm sure there is some method to account for this. A simple transfer of commodity (savings into the market) would show an increase in the market, but at some point these people will want their money back.

If this large increase has been the result of the baby boomer generation sticking it in for retirement, you could see the market really deflate as they get older and have to find some way to pay their medical bills.

strewth .......now I can see why yer ain't trading yet

 

[sidinuk]

Ok I'm new to elite trader and I've just plowed through 20 pages of debate on zsg. OK I got a bit bored towards the end, so forgive me if I repeat here something that someone else has already said.

The futures market is a zero sum game, the stock market isn't.

Futures contracts are just bits of paper that we have invented to provide something to trade (ok it's a bit more complicated than that!). Its like a £50 note, the paper it is made out of is worthless, but everyone accepts its value as £50. For every contract there must be a buyer and a seller and when it expires thats the end of it. There was nothing in the beginning and theres nothing at the end, all that has happened is that in the meantime 1000's of people have bought and sold this bit of paper depending on what they think it is worth at the time. Some make a profit, some make a loss but at expiry the total sum of winners and losers is zero.

The stock market is different, the underlying shares represent companies. I know this may come as a shock to some traders but Cisco, Microsoft et al are real. They employ people and resources to create products and provide services. The employment of resources creates value, this value is reflected in the share price. Fundamentally a share is worth the net present value of the future return from that share (dividends). In practice the share price moves all over the place due to speculation but in the long run it will reflect the future value of the company. Eg Worldcom, Enron etc have no future therefore they are worthless.

The stock market is not a zero sum game because the shares have a true underlying value which depends on the future returns from that company. Of course some people will think the future is bright, others will think it stinks, nobody actually knows.

Anyway, hope that makes some sense!

 

[stu]

I agree Futures are zero sum Stocks are not
I don't agree with your reason. I don't think it matters whether Microsoft (used as an example) creates wealth or employs people for the definition of zero sum.
The point is that the shares created by Microsoft when taken up by a trader will not cost Microsoft loss if they go up or down. In fact Microsoft 'win' when they dispose of them. Therefore zero sum cannot apply. Once Microsoft have got rid of their shares in theory everyone could always win when they traded them on. The stock could always rise. Even if the stock declines over time and returns to zero that's not the definition for zero sum. The definition is the other side of the trade MUST lose (not could lose) for the other to win and vice versa.

In a Futures contract to trade, it will cost the seller if the buyer wins and it will cost the buyer if the seller wins

 

[sidinuk]

Possibly for the sake of the zero sum game argument it doesn't matter what Microsoft does with the cash it raised from selling shares. I was just trying to define a difference between futures and stocks.

In theory everyone should win with stock, as the company raises cash from the issue and the investors obtain a return on their investment in the form of divi's. The customers of the company are receiving a product or service that they want, so everyone is happy!

I think the confussion on this board has arisen because traders use stock for short term speculation and get used to winning some and losing some, much like they would with a futures contract and lose sight of the longer term objective of holding stocks as an investment.

 

[aphexcoil]

Its like a £50 note, the paper it is made out of is worthless, but everyone accepts its value as £50.

I guess you could say the same thing about money, stock certificates, bonds, checks or anything else that is just a piece of paper but everyone accepts has value!! How are futures contracts any different?

 

[sidinuk]

I guess you could say the same thing about money, stock certificates, bonds, checks or anything else that is just a piece of paper but everyone accepts has value!! How are futures contracts any different?

I accept what you are saying that a share certificate is the same as a banknote in that its a bit of paper with something written on it that we accept has a certain meaning and value, but I didn't mean it quite that literally.

Futures contracts have a known expiry date which money and stock certs don't. A futures contract does have value (as determined by the price that buyers and sellers are willing to deal at) until it expires. Once it expires thats the end of it.

Cash has a fixed value, a £50 note is going to be worth £50 to me next week, next year or when ever and everyone expects that to be the case. Of course £50 sterling could be worth $70 this week and $80 next week, but then we are getting into talking about currency trading - Now is that a Zero Sum Game???