What Does Zero-Sum Game Mean? A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another. Options and future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling is also an example of a zero-sum game.
For example, I buy RIL for 375. I sell it a week latter for 385 to Stock Buyer-2. Stock Buyer-2 sells the same stock a week latter for 395. I made money and Stock Buyer-2 made money. No one lost money. This same process can yield losses when for everyone when stock prices declines. If I buy RIL at 395 and sell it to Stock Buyer-2 for 385 and Stock Buyer-2 sells RIL for 375, then we both have a loss. Everyone lost money. Here is another simple example (using actual share prices and dates) that shows why the stock market is not a zero-sum game but rather a positive-sum game (where the whole pie grows rather than where the pie stays fixed): An investor buys 1,000 shares of Johnson & Johnson stock at $10 per share in 1994. A year later, the shares are sold to another investor at a price of $15 a share. This investor sells the same 1,000 shares to another at the end of 1996 for $20 per share who, in turn, sells the same shares to another investor at the end of 1997 for $30 per share. Each investor has made a nice capital gain on the purchase and sale and collected dividends for a year as well. Clearly not all transactions show a gain, as it is all too easy to buy high and sell low. But the key point is that a gain by one investor is not an automatic and equal loss for another investor.
In the stock market when you go long you are simply buying something, just as if you were buying some gold, or oil, or anything else where you are just acquiring something out of an inventory of supply. No one has to go short in order for you to go long. While it is true that stock is a liability on the books of the company that issues them, that liability does not rise or fall with stock price, and the company is not required to ever buy the stock back, so it’s not the same as being short the stock. Shorting stock means that you actually have to borrow the stock from someone who is long in order to sell them. You can’t just sell something you have no possession of as you can in other markets. That’s why stock trading is not considered zero sum. If you buy Google at $10 and it runs to $10,000 then it represents a growth in your assets, but not a growth in someone else’s liability. Stocks are not simply investments traded from one party to another. Rather, they're representative of the underlying business. So if the business creates value, the stock will do so for the investor as well.
Here are some links with details on the same discussion, which I have referred to: 1, 2, 3, 4, 5
A stock market, however, is not a zero-sum game because wealth can be created in a stock market.Most people think the stock market is a zero sum game because there is a buyer for each seller and seller for each buyer so each cancels the other and everything is equal. Not quite. The question is not "Is there a buyer for every seller?" but "Is there a short position for every long position?" to determine if it is a zero-sum game. As long as there is a short position for every long position, every time one person makes a dollar someone else loses a dollar. That makes the total average return (before expenses) zero. With a stock, there can never be as many short positions as long positions. When a company first issues shares there are no short positions. After that, every time someone shorts a share one new long share is essentially created, so there will always be more long shares than short shares. That, in turn, means when the price of the stock goes up more money is made than lost, so it is not a zero-sum game. As the overall market tends to rise in value over time, therefore most investors are statistically predestined to be winners should they hold their positions over the long haul. Don't miss the fact that dividend payments add to the return on investment with a stream of income in such a way that the "pot" is constantly sweetened, thereby increasing the overall return all investors beyond the simple capital gain of a purchase and later sale.
For example, I buy RIL for 375. I sell it a week latter for 385 to Stock Buyer-2. Stock Buyer-2 sells the same stock a week latter for 395. I made money and Stock Buyer-2 made money. No one lost money. This same process can yield losses when for everyone when stock prices declines. If I buy RIL at 395 and sell it to Stock Buyer-2 for 385 and Stock Buyer-2 sells RIL for 375, then we both have a loss. Everyone lost money. Here is another simple example (using actual share prices and dates) that shows why the stock market is not a zero-sum game but rather a positive-sum game (where the whole pie grows rather than where the pie stays fixed): An investor buys 1,000 shares of Johnson & Johnson stock at $10 per share in 1994. A year later, the shares are sold to another investor at a price of $15 a share. This investor sells the same 1,000 shares to another at the end of 1996 for $20 per share who, in turn, sells the same shares to another investor at the end of 1997 for $30 per share. Each investor has made a nice capital gain on the purchase and sale and collected dividends for a year as well. Clearly not all transactions show a gain, as it is all too easy to buy high and sell low. But the key point is that a gain by one investor is not an automatic and equal loss for another investor.
In the stock market when you go long you are simply buying something, just as if you were buying some gold, or oil, or anything else where you are just acquiring something out of an inventory of supply. No one has to go short in order for you to go long. While it is true that stock is a liability on the books of the company that issues them, that liability does not rise or fall with stock price, and the company is not required to ever buy the stock back, so it’s not the same as being short the stock. Shorting stock means that you actually have to borrow the stock from someone who is long in order to sell them. You can’t just sell something you have no possession of as you can in other markets. That’s why stock trading is not considered zero sum. If you buy Google at $10 and it runs to $10,000 then it represents a growth in your assets, but not a growth in someone else’s liability. Stocks are not simply investments traded from one party to another. Rather, they're representative of the underlying business. So if the business creates value, the stock will do so for the investor as well.
Here are some links with details on the same discussion, which I have referred to: 1, 2, 3, 4, 5
