re zero sum: The key element that confuses people imho is the fact that the game never stops. The stock market is like a game of musical chairs that goes on forever, where the number of chairs is determined by the money supply. Or you can think of the stockmarket as a pie. At any given point there is a finite amount of dollars in the game. This amount is always fluctuating as money goes in and out, but the point is that there is always a defined pie. So we have a living pie that expands and contracts like a beating heart.
In a futures contract, the winners and losers are defined and traceable and the game has a time limit (the expiration of the contract in question). Stocks are no different EXCEPT that the expiration date is some point way off in the future when the markets stop for whatever reason. Same game, just no time limit.
If I short MSO and take money from Martha Stewart, that money is lost to her for good. If the stock goes back up, she gets money back but NOT THE SAME MONEY (unless I am buying MSO for some nutty reason). If you are a buy and holder and lose your money to trader Peter, you may eventually get it back from new long term investor Paul. But it's not the same money. It looks the same to you, because a dollar is a dollar- money is a fungible commodity like wheat or lumber. But in reality there are finite winners and losers every day. The losers still in are simply banking on the odds of becoming winners at a later date.
Pretty much all long term investment strategies depend on the benign effects of inflation and a constant influx of assets as workers put their savings in stocks. This is why money supply is so much more important than people think. If the market is gorged with cash, the broad market will go higher for the same reason a laundry bag will expand if you put enough socks in it.
It works in reverse too. When the pie shrinks, there is less pie to eat all around, and the weak players at all levels of the game get squeezed. Just as turkeys can fly in a tornado, stocks of great companies can go down simply because there is not enough money to keep the broad market up. This, coincidentally, is why Greenspan is such an idiotic jerk. He is the main culprit of the bubble because he drowned wall street in a sea of excess liquidity and then acted naive when everyone went nuts.
So it's a zero sum game and the brokers/middlemen play the game also, they get hurt in contraction just like traders do. Money coming in versus money coming out determines the size of the pie, and everyone directly tied to the market lives and dies based on the here and now size of that pie and how effectively they can compete for a piece.
In a futures contract, the winners and losers are defined and traceable and the game has a time limit (the expiration of the contract in question). Stocks are no different EXCEPT that the expiration date is some point way off in the future when the markets stop for whatever reason. Same game, just no time limit.
If I short MSO and take money from Martha Stewart, that money is lost to her for good. If the stock goes back up, she gets money back but NOT THE SAME MONEY (unless I am buying MSO for some nutty reason). If you are a buy and holder and lose your money to trader Peter, you may eventually get it back from new long term investor Paul. But it's not the same money. It looks the same to you, because a dollar is a dollar- money is a fungible commodity like wheat or lumber. But in reality there are finite winners and losers every day. The losers still in are simply banking on the odds of becoming winners at a later date.
Pretty much all long term investment strategies depend on the benign effects of inflation and a constant influx of assets as workers put their savings in stocks. This is why money supply is so much more important than people think. If the market is gorged with cash, the broad market will go higher for the same reason a laundry bag will expand if you put enough socks in it.
It works in reverse too. When the pie shrinks, there is less pie to eat all around, and the weak players at all levels of the game get squeezed. Just as turkeys can fly in a tornado, stocks of great companies can go down simply because there is not enough money to keep the broad market up. This, coincidentally, is why Greenspan is such an idiotic jerk. He is the main culprit of the bubble because he drowned wall street in a sea of excess liquidity and then acted naive when everyone went nuts.
So it's a zero sum game and the brokers/middlemen play the game also, they get hurt in contraction just like traders do. Money coming in versus money coming out determines the size of the pie, and everyone directly tied to the market lives and dies based on the here and now size of that pie and how effectively they can compete for a piece.