Post: #1

Hey guys. I know there are some pretty well experienced guys on here so I wish to ask this. When someone makes money on the stock market, must someone else be losing money?
This could be through the stock market, foreign exchange or bonds. Is it true that when someone makes a profit, does someone else have to be losing money (which is out of their control)?

Post: #2

No it is not a zero sum game.
Trading in derivatives (futures and options) however is.

Post: #3

Post: #4

(07-20-2016 06:33 AM)Mercenary Wrote:  

I really don't get it. Clickbait to where? I don't have a business listed or stuff. Just trying to get insight into an economic issue.

Cheers man.

Post: #5

Use the search function Cobra and robreke have dropped quite a bit on the Finanace industry.

Post: #6

The answer to your question, in the big picture, is no; someone does not have to be losing money when someone is making money in the stock market.

I think you are confusing the buy/sell stock transfer with the overall value of the business over time.

In the smallest view, one person buying shares at the same price another person selling shares, is zero sum. Since, except for commissions charged by the brokerage firm to both sides, the purchase price equals the sales price.

But in the larger picture, people are buying and selling ownership interests in a business. If the business does well and grows over time, and treats the equity holders properly (i.e. management does not pay themselves large salaries, they pay out a dividend and increase the dividend over the years, insiders do not dilute the existing shareholders) then the value of that ownership increases, becomes more valuable over time, and all shareholders benefit.

On the other side, if a business does poorly, or the insiders treat the equity owners poorly (never pay dividends, constantly issuing more common shares and diluting existing shareholders' ownership, insiders paying all of the profits to themselves in the form of large salaries), then shareholders do lose over time and suffer.

Post: #7

It's an honest question, though it would be better served in the lifestyle section.

Post: #8

(07-20-2016 06:26 AM)kurti Wrote:  No it is not a zero sum game.
Trading in derivatives (futures and options) however is.

That's always a pet peeve when people refer to options trading as zero sum. The true purpose of options is to reduce price volatility, and is really no different than a form of insurance. If you're a farmer and need to sell $40 corn to be profitable, then you can pay $2 for the right to sell at $40 6 months down the road. Financially it may be (or less than)zero sum, but that's assuming all dollars are creating equal. $2 sure cost is far more manageable then the uncertainty that the price may tumble to 1/2, going hungry, and losing your farm. That's where the value differential lies. For a farmer, the price plunging 50% has a much larger cost associated with it, then a corresponding gain of 50%.

Are you shorting a stock? Your potential losses can literally be infinite. However if you've bought the right to buy a stock at a certain level, you've literally taken your potential losses from infinite, to some more reasonable ceiling.

Similarly, if you are in a position where most dollars you have are equal, then it makes sense to be the one writing options. Be the insurance company. The majority of options expire worthless, which means they were written with a premium in excess of the true likelihood of a big price change. You'll get burned a few times, but provided your premiums where correct, over long haul you will make money.