I'd like to reply to the "zero sum game" idea. It certainly applies, or seems to apply, to securities trading in the short term -- the shorter the term, the more it seems to apply.
However, I think in the deeper analysis, it does not. Capital is an asset in the market for goods and services. Efficient capitalization of an enterprise is a win-win situation. A guy with a better mousetrap is able to manufacture, advertise, etc. and makes more money. The investor makes a good return on his investment. The public gets a better mousetrap. So far so good -- it's a win-win-win situation.
How about when John buys the initial offering of XYZ for $10 and then sells it to Peter for $20? It's still a win-win situation, despite the element of risk. Peter, basically, wants the risk that XYZ is going to flourish and his investment will be a good use of his capital. John may have another, better place to invest, or want to buy a new boat. It's important to see that if you eliminated risk entirely, the market would still exist.
In addition, this liquidity enables increased efficiency in the capital market, because John was relying upon it when he made his initial investment.
Even the very short term trader (with the possible exception of some scalpers) makes the market more efficient and increases the amount of capital available. It is still not necessarily a zero-sum game, at least in theory. Capitalization of business creates value where it didn't exist before. If you bought the initial stock in say Coca Cola or a good bank or utility, you saw better income over your entire lifetime than if you had hidden the money under your mattress.
So let's look at the day trader. It appears to be a zero sum game at the single trade level, and an individual may indeed go broke while other individuals pocket his money. But in the aggragate picture, daytrading represents an investment vehicle that benefits both the traders and the "consumers" of capital.
However, I think in the deeper analysis, it does not. Capital is an asset in the market for goods and services. Efficient capitalization of an enterprise is a win-win situation. A guy with a better mousetrap is able to manufacture, advertise, etc. and makes more money. The investor makes a good return on his investment. The public gets a better mousetrap. So far so good -- it's a win-win-win situation.
How about when John buys the initial offering of XYZ for $10 and then sells it to Peter for $20? It's still a win-win situation, despite the element of risk. Peter, basically, wants the risk that XYZ is going to flourish and his investment will be a good use of his capital. John may have another, better place to invest, or want to buy a new boat. It's important to see that if you eliminated risk entirely, the market would still exist.
In addition, this liquidity enables increased efficiency in the capital market, because John was relying upon it when he made his initial investment.
Even the very short term trader (with the possible exception of some scalpers) makes the market more efficient and increases the amount of capital available. It is still not necessarily a zero-sum game, at least in theory. Capitalization of business creates value where it didn't exist before. If you bought the initial stock in say Coca Cola or a good bank or utility, you saw better income over your entire lifetime than if you had hidden the money under your mattress.
So let's look at the day trader. It appears to be a zero sum game at the single trade level, and an individual may indeed go broke while other individuals pocket his money. But in the aggragate picture, daytrading represents an investment vehicle that benefits both the traders and the "consumers" of capital.
