I think you are looking at this “fixed sum” game too narrowly, simply in terms of a single transaction. In reality, nothing about stock speculation is fixed. As alluded to several times earlier, tiny differences in price over the periods of seconds or minutes allow for the trading of equities that can create or destroy some amount of wealth. Taking one snapshot in time in which Bob and Alice make an exchange that profits Bob by $10 not at the expense of Alice is a strange way to look at a fixed-sum game, because at that exact same instant there are other traders who may have bought the IPO at $20 and are selling their shares at $29.65, $30.25, or many other prices for which they can find buyers. Since the value of the stock is very much not fixed, and there is no outside agency providing prizes for investors to compete over, I would tend to think of stock trading as not being a fixed sum game at all.
Well, that’s possible, but if we think about the OP’s comment about questioning the value of stock speculation, then let’s get real: the vast majority of investors are speculators, not investors. For example, I have a couple hundred thousand dollars in a 401k-like plan that tracks the S&P 500. Even though that’s a very broad investment, how much of that portfolio is actually based on investments in IPOs, as opposed to speculating in the resale of equities? Shoot, virtually all of it. So stock speculation in a broad sense is pretty good for me and my retirement.
As far as the value of the day trader, once again, just because they don’t produce a tangible thing, they are still attempting to create wealth, which is about as good a job as any. Personally, I think most day traders are nuts to think that they can look at charts all day and time the market to make large gains on small movements of stock prices, but hey – I think people who invest in airlines are pretty nuts, too, considering the large risks and small profit margins that seem too common in that business. If someone is out there making profits in a way that isn’t actually harming someone, then good on them – and I can’t see what harm a day trader is causing if they are acting legally and ethically. The annoyance that “they aren’t producing anything real” is not a valid criticism in my book.
It seems to me that stock trading is always going to be a game in which information is key. If you know that corporation X (Solyndra) is about to go belly up, you can make fast money shorting the stock.
The vast majority of investors never have access to up-to-the-minute information about a companie’s status-that is why it is difficult for small investors to make short term profits in the market.
As for long term profits…buy and hold (Warren Bffet) is probably the best strategy to make money.
When someone is criticizing corporate bigwigs for getting outrageous compensation, it’s not usually because of legitimate “profits.” It’s because of outrageous executive compensation, which doesn’t necessarily benefit shareholders at all. In fact, in the recent market crash, there were a lot of corporate executives raking it in while giving the screw to their shareholders.
Microsoft shareholders have an ongoing complaint about Microsoft’s hoarding of cash and refusing to pay dividends to shareholders.
To address your points one by one:
A. Consider two stable points in time, say separated by several months. One might assume Universal Widgets has a stable price at both the beginning and the end of this period. (Yes, I’m not being fully rigorous.) That the stock was traded at various prices in the middle of that period only helps “my side” of the debate. If you bought stock for $40.50 while I was paying 40.55 you've "created" an additional .05 of wealth, as did the seller who sold to me. But your seller, and me, lost that $0.05.
B. We haven’t defined the difference between “speculator” and “investor.” I assumed the difference was based on time lag between buy and sell (although that’s oversimplified for stocks, and perhaps quite wrong for derivatives).
C. By “creating wealth” do you mean “making a profit for oneself”? I (and OP, I think) are using the term to mean "create new value (e.g. goods or services) for society. A market-maker, in addition to creating profit for himself, can create valuable liquidity for the marketplace. Once there is “enough” liquidity, there is little value (indeed possible dangers) in additional liquidity.
Be aware I do not condemn traders who profit, but do not create value for society. I blame a system which encourages it.
I’m not quite sure I’m following you here. If I buy something at a slightly slower price than you, I haven’t created any wealth. And the seller hasn’t lost 5 cents of wealth, either. The stock doesn’t have an intrinsic and defined value; it’s value is what it can be bought and sold for. You haven’t been cheated or become more poor because I paid a better price than you.
Several people suggested that those who buy an IPO are the “real” investors, and everyone after that are speculators. They didn’t use those words exactly, but that’s how I summarize their comments. Since the number of things to debate is quite large, I concede to this definition.
Not for one’s self, but adding to the economy. Just like people talk about the trillions of dollars of wealth that was destroyed in the stock market crashes in 2008, the rise of the value of businesses represented by their stock is an increase to wealth.
I think that’s a meaningless, subjective, and irrelevant concept. I think black licorice is awful and anyone who makes it isn’t contributing anything valuable to society. In fact, there’s too much licorice in the world already, and the creation of more is just dragging us down.
The manufactures are, however, creating wealth by making and selling their product. That’s why I prefer to talk about wealth rather than the value-laden term of.. er, “value.”
Even that is becoming less and less profitable for the little guy. 75% of all equity trades on the stock market are high frequency trades made by computer programs, so while you are waiting for your page to load, the stock has dropped 10%.
I’m having a hard time taking you seriously when you write that you like neither black licorice nor Indian food
I think maybe I’m glimpsing your point, however. Producing black licorice is a valuable service, because there are people willing to pay for it. By the same token, speculation is a valuable service, because there are people willing to trade. Right?
Well, not really. Because money are obviously entering this market in some way (otherwise, it would all be lost on food and other commodities by now), and if those inside the market aren’t performing any service that is valued outside the market then they are free-riding on society.
Compare with a pyramid scheme - all it does is redistribute money, without creating anything. I realise now that speculation creates liquidity, which is valued outside the market in a way, although it might still be overpriced. If septimus’ point about enough liquidity is valid, then there are indeed people out there making money on trade without adding value. And let’s not forget all the people losing money on trade - you might say they’ve chosen it themselves, but it’s not necessarily a good thing to give them the opportunity. In that case, all kinds of drugs should be legal and unrestricted, too, as should pyramid schemes.
But to clarify - we’ve more or less agreed that speculation creates liquidity, which is a good thing®, and now we’re discussing whether it is acceptable to earn money without adding value to society, yes?
Because they work for the shareholders who do make money based on the stock price, even if that price is manipulated by providing false and misleading information to anyone except insiders.
Don’t ANYBODY see a problem here? How have our busy, busy little financial traders managed to gamble more than the ENTIRE WEALTH OF THE WORLD SEVERAL TIMES OVER?
That’s the notional value of all derivatives in the derivatives market. That’s not the amount that people have “managed to gamble.” I’ll wait right here while you read up on what the notional value of a derivatives contract is.
And we will thank you for your contribution to this thread if we begin discussing physical laws and the like. As it turns out, we are currently discussing social institutions and the like.
