I don’t think it changes anything that traders are making money on other people’s behalf. That just means a bigger group are making money off everyone else. Where I live, we have a very good pension fund - the traders working for it are certainly benefiting my future self, but as far as I can understand, at the expense of people in other countries who come out on the losing end of their deals.
As far as I can see, everyone gains from the efforts of producers (of food, clothing, houses, art, &c), but stock trading seems to me like a zero-sum game, where you can’t make money without someone else losing that same amount.
I think that is my refined question - is stock trading a zero-sum game?
I didn’t think of that - but it sounds even worse, IFF speculators don’t add value.
Voyager: I’m prepared to accept that speculation might be a necessary evil (or indeed that it is entirely beneficial). I’m not really asking what should be done, but rather if there is a problem at all.
The purchase of the stock from the corporation, in the first place, is an investment. I think you’ll agree on that, right? It benefits the company because that company can now make investments to build new factories or do more research. It benefits the investor because he’s counting on those future increased dividends to pay back his investment, and more.
But as you’ve correctly noted, the buying and selling of these shares afterwards is a zero-sum game. Actually, it’s a little less than zero, because there are transaction costs; however those transaction costs are borne by the buyers and sellers so it’s not your concern. Does the fact that these aftermarket trades are zero-sum bother you? The ability to sell my shares later on is necessary, because I wouldn’t invest in a company if I’m not allowed to sell my shares later if I changed my mind. It’s just the way it has to be. The market for buying and selling shares needs to be liquid, else there is disincentive to make those initial investments that fund those corporate investments in the first place.
Errr… so let’s say you buy one share of the IPO of Groupon for $20. A few months later, I buy it from you for $30.
Groupon profits by $20, you profit by $10, and I own an asset that at that moment is worth $30. How is that a zero-sum game? Who, exactly, ended up with a loss of $10 so that you could profit by $10?
For many purposes, including OP’s, “fixed-sum game” is more meaningful than “zero-sum game.”
OP may be asking what portion of price appreciation is typically delivered to brokers and short-term traders. I’m more concerned with instabilities created by hyper-efficient methods like “high speed trading” and unregulated derivatives.
As I mentioned in my post, I’m here talking specifically about the transaction that goes on between me and you, at a point in time after my $20 investment with Groupon (to use your example).
The transaction between you and me is zero-sum. I had a share of Groupon, you had $30. Now you have a share of Groupon and I have $30. That’s zero-sum. The investment with Groupon, with which they can buy more computer equipment and programmers, had already happened. That part is NOT zero-sum; just the transaction between you and me.
You are mixing executive pay with stockbroker compensation for reasons I don’t understand.
If you don’t like the executives siphoning off profits then buy the stock and vote them out. I know that is overly simplistic but just complaining that the rich guys take all the money and I (or we) can’t do anything about it and stocks are at fault is extremely flawed. The market is far from perfect but I can’t see how that would be corrected by getting rid of the brokers. Would the world be a better place if the only way I could get a share of Microsoft was by purchasing it from someone I know personally? How would that stop executives from sphoning profits?
The stock holders of AIG and Lehman Bros have themselves to blame. They didn’t squeak about methods when the top guys were hauling in the profits, as long as they got their share. The crying started when the money stopped flowing.
I would certainly support something like a tax on trading, just like any other sales tax, to slow down things like day trading. Every other thing in America has a sales tax, why not stock trades?
First, people aren’t forced to sell stocks when someone else wants to buy it. The freely are selling something in exchange for cash which they apparently value more than holding the stock.
Second, if I buy XYZ at $10.00 hold it for a year and sell it for $10.70, that doesn’t mean that the person buying from me lost $0.70…it means the value of the company appreciated by 7%. But let’s assume that the second year the stock price of XYZ fell to $9.30, and holder #2 decides to sell. Why did the stock fall? Presumably, it was because the earnings potential of XYZ fell, maybe a competing technology was introduced and they are no longer as competitive. Holder #2 has to decide if he believes the value of XYZ is really $9.30 or higher or lower. If he thinks it will appreciate he will hold, if he thinks it will go lower or not change, he will likely sell. It has nothing to do with someone else making or losing money.
That’s not zero-sum. I have a share of Groupon that I believe will pay dividends or appreciate in value greater than the $30 in cash I used to have. You now have $30 which is $10 more than you originally invested in Groupon.
I came up with a very long post that basically said this. Rather than me trying to argue the point, since I am most definitely not a financial expert, I would rely on people who know more than I do: The Fools.
You’re not wrong. And FTR, I don’t actually think the whole thing is completely valueless…but I posted the above to indicate that I and I think a lot of other average Americans regard the whole thing with a deep sense of distrust, even if we partake in it.
You’ll pardon me if I don’t find the frankly biased comments on this particular message board as truly helpful. I don’t mean that in a snarky way, it is just very hard to get truly accurate information when one is always defending or attacking.
I’m sure it’s useful to someone. In other words, as Lewis Black says, what the stock market ticker tells us is - someone’s getting rich, and it ain’t us.
Omar Little: But if the company appreciates by 7%, how is that thanks to the shareholders (unless they are workers or original investors)? I get that part of the value for workers and investors of having shares is the ability to sell them, and it’s hard to draw a line in the sand here, but at some point, it seems to me that people are making money off a company’s performance (or lack of it, in the case of shorting), without contributing to said performance. That’s what I want to hear justified, even if zero-sum game is the wrong concept to explain what’s going on.
Again, I’m not asking what’s to be done about this, and my hunch is that some trading is good, but excessive trading isn’t - if that’s the case, it might be hard to regulate away the ‘bad’ trading.
Here’s the problem – if someone were to say, for example, “I, and a lot of ther average Americans, regard this global warming business with a deep sense of distrust,” you would be set upon by the board equivalent of a pack of wolves, shouted at for your obtuse ignorance and cursed, down to the tenth generation.
With some justice, I think – because while we can quibble about some details, the general fact that CO[sub]2[/sub] is a greenhouse gas, greenhouse gases contribute to climate change, and humans have been pumping a great deal of CO[sub]2[/sub] into the atmosphere for the past hundred and fifty years in ever-increasing amounts.
Now this – you’re comfortable admitting you don’t really know the details, but still have distrust. There are resources off the boards that can provide good primers – The Fools, linked above, is not bad – but ten minutes’ worth of reading should be sufficient to understand the basics of stocks. We can still quibble over details, but not over the basic fact that there’s no “zero-sum” game involved.
