Zero Sum Theory.

My valued friends, things are different.

Derivatives trading is a zero sum game (e.g. wealth / asset distribution and not creation): Some money to the exchanges, some to the clearing house and broker and split pot for both sides (e.g. buyer and seller): So, in macro view there is no addition here. Get out what was thrown in.

But: Equities trading is NOT a zero sum game. At least if there are other holders of an similar equity (recte asset) since their assets are directly influenced by transactions and thus price statements especially if the reported prices are different from the prices of former periods.

Now you got it: The central difference is that the latter one is based on trading an asset which might change the assets value when transaction takes place and so creating or destructing asset values for each and every other owner of an similar asset (e.g. each stock holder or house owner etc).

For example: Take a look at your personal balance sheet. I suppose some assets there (house, car, some stocks or funds) and some liabilities (mortgage, credit card). Balancing both sides result in some net asset value (equity), hopefully. Now, assume all of your assets are going to zero value tomorrow, since the market price dictates so. Ho wis your net asset value / equity? Are you player of a zero sum game, my dear?


MK
 
dear chums,

if i am a government, and i take the not so radical idea of printing another trillion $ or two, what affect are my said actions having on your non zero sum theory? am i creating wealth? what are the implications to the value of your house, car, pension, investments, beer money?

respectfully yours,

mr f bloggs esq.
 
Hello Fred.

I suppose you are implying that govt. inflates and thus reduces asset values.

First of all, if asset prices are rising (means, price today is higher than price in the period before) asset values are rising, too. This is true since there is simply no other way to measure or value assets than in money.

Second, I have replied to the question whether "Trading Is A Zero Sum Game, Or Not". So, I say, yes it is, when strictly focused on derivatives trading. But it is not when including equities trading.

So, in your case: Yes, if asset values are rising asset values are "created".

Regards.


MK
 
Dear Bill and friends,

please read my post before replying.

Imagine the following: Person A, B and C. Mr A and Mrs B are the lucky ones owning ten stocks of company X each. Yesterday stock of X was priced at $10. So the equity (this is assets minus liabilities, which are assumed with zero here) of Mr A is $100 (ten times the share price) and the equity or net assets of Mrs B is worth $100, too.

Early this morning Mr C came up with the idea of buying one lousy share of company X at any price below $20 (e.g. "BUY 1 X LIMIT 20"). As Mrs. B is the only one willing to sell shares of X and she is demanding a price of exactly $20, the transaction takes place at the named size (one piece) and price ($20) resulting in the fact that every owner of X shares activates his shares in his balance sheet as an asset with exactly this price of $20. So we got the following net asset values:

A: 10 * $20 = $200
B: 9 * 20 = $180
C: 1 * 20 = $20
-----------------------
sum = $400

This is obviously much more than what we had before the transaction took place (sum = $200). So, if the sum is another than the sum the period before, how can you name it a zero-sum-game? So, pleeeease: Let me know.


MK
 
It's easy to see how futures trading is "zero sum" (minus the vig, of course)... for every winning tick there is a losing tick.. and each day longs and shorts "settle up".

It's also easy to see that equities are NOT zero sum. However that perception is false. There are periods (bull markets) where each buyer makes money, so "how could it be zero sum"? Well, there are periods where nearly all buyers/holders lose money...

In the "long run, big picture" of a company's birth => death, there are nearly all winners on the way up and nearly all losers on the way down.... until the company (or the ones it's merged into) die and disappear.... hence, "zero sum".

It has been said, "there are no growth companies, only growth periods"...

The fact that the equities market is also zero sum has nothing to do with what we all try to accomplish.
 
Scata,

you are wrong. Imagine the transaction in my example will be the last transaction ever recorded in stock X. Anyway, quotes are provided at $19 to $21 anyway. Just no transaction anymore. Where is the way down? Where everyone loses?

Another way: Imagine the asset is not a stock but a house evaluating the housing market. Of course there are ups and downs but I expect we will never reach housing market prices of the early twentieth century again.

So, you are right: There are ups where everybody wins and downs whjere the majority loses but there is absolutely no law that each price has to go back where it came from or did I miss something.

Come On.


MK
 
Quote from MK90210:

Scata,

you are wrong. Imagine the transaction in my example will be the last transaction ever recorded in stock X. Anyway, quotes are provided at $19 to $21 anyway. Just no transaction anymore. Where is the way down? Where everyone loses?

Another way: Imagine the asset is not a stock but a house evaluating the housing market. Of course there are ups and downs but I expect we will never reach housing market prices of the early twentieth century again.

So, you are right: There are ups where everybody wins and downs whjere the majority loses but there is absolutely no law that each price has to go back where it came from or did I miss something.

Come On.


MK
More...

Zero Sum in equities is a little abstract for most to grasp, mostly because the winning period and the losing period is usually at least several years apart.... but can be separated by decades. The notion is irrelevant to any kind of trading style but does argue against long term "buy and hold".

In your example, what happened after the "last quotes at $19-$21"? The story on this issue hasn't ended yet.
 
There has never been a 20 yr period where the stock market did not go up. I believe that the market averages approx 8% per annum. How is that zero sum?
 
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