Are stocks a zero-sum game or a positive-sum game? Stocks can include both, depending on the point of view and method you use.
Some time ago, someone asked Stockbit about this. I think this is quite an interesting topic for us to discuss.
Here are his questions, rewrite one
“In this stock exchange….is it possible or not….everyone wins….or if someone wins there must be a loss or in other words….our money comes from other people’s losses?”
So basically, he’s asking if stocks are a zero-sum game?
What are Zero-Sum Games?
Most of you are familiar with the term zero-sum game, but to make that clear, it’s worth going over it briefly. In Game Theory, a zero-sum game is a situation in which one person’s gain equals the other person’s loss. So the net change in wealth or benefits is zero. In this situation, A’s capital is 10 million and if B loses 10 million, the change in wealth is zero. The most common example is gambling games where the total wins of some players are equal to the total losses of the losing parties.
So clearly, the member’s question, “…our money comes from other people’s losses” refers to a zero-sum game.
Stocks Can Be A Zero-sum Game
Answering this question, stocks can only become a zero-sum game if the contents are HAKA BUKI, one person sells a profit and the other sells a loss. This can happen to fried stocks whose fluctuations are purely influenced by supply and demand for a moment – sometimes they even touch manipulation.
Especially if what you see is the short term, it is very possible that stocks will become a zero-sum game. The most obvious happens when it leads to the game The Greater Foolwhere the last to buy will be the “stupidest” who has to bear the loss.
In fact, it could be, stocks are included in the negative-sum game (total net profit is less than zero) because there is a broker’s commission and final tax for each transaction.
Fortunately, stocks are not just paper (or sheets in OLT). 😎 But before going there, let me explain first about the term positive-sum game.
What is a Positive-Sum Game?
In Game Theory, the term positive-sum game is used in situations where the total gains and losses are greater than zero. Or in other words, the total profit is greater than the total loss. This positive number results – somehow and from where – there is an addition of resources (eg wealth) so that the result becomes positive. The result in this situation, could happen win-win solution…. all participants benefit. KREN right? 😎
An example in the real world is the trading business.
Trade – assumptions fair trade – including the positive-sum game. Because at each stage every actor gets a profit margin and everyone feels that they are benefiting.
Producers produce goods and sell their products to distributors, distributors sell to wholesalers, wholesalers sell to retailers, until finally they sell to retailers end user. Each participant, starting from producers, distributors, wholesalers, retailers, gets profit margins.
How about end user? End users feel that they are getting benefits, for example, they are full if the product is food, healthy if they buy medicine, or are satisfied after using services, and so on. This whole process is a positive-sum game, no one is harmed, everyone gets benefits (benefits).
Like this article? Enter your email to get the latest articles via email. NO SPAM.
Stocks are a Positive-Sum Game
Back to the SB member’s original question, “Can everything be profitable on this stock exchange or… can our money come from other people’s losses?”
The answer is YES. Everyone can profit because stocks are basically not a zero-sum game, but a positive-sum game.
How come everyone is lucky?
Remember, behind every share is a company that runs the business. From this business there will be added value, which comes from net profit and positive cash flow generated by the company from its operations. This profit and cash flow will later become dividends or increase the issuer’s intrinsic value. This causes the resources that can be distributed to all participants to always be positive, aka everyone can profit.
If you look at it like this, then stock investment should not be a zero-sum game, but stock investment is a positive-sum game.
An example of a positive sum game in stocks, for example, A buys shares at a price of 500, for some reason then sells them to B at a price of 700. Then B HODLs the stock and gets a profit in the coming years from the company’s performance. In this case, no one is harmed. All profit.
In short, all can profit, provided that with two conditions:
- Buy it at a fair price and let it go.
- The company is profitable. The intrinsic value goes up or the company distributes dividends.
Notice I wrote the first point, buy at a fair price, this means that buyers and sellers are both “profitable” or at least it happens fair trade. But unfortunately (or fortunately? 🙈), often the price (price) and value (value) a stock Jaka Sembung alias not connected. So sometimes there are those who are cheap (those who buy profit, those who sell at a loss), sometimes there are those who are expensive (those who sell profit, those who buy loss).
So even though stocks are a positive-sum game, you can still suffer losses if:
- Buy too expensive or CL (Cut Loss) halfway.
- The company turns out to be at a loss and its intrinsic value is down.
To avoid buying too expensive, you can read my article about Stock Buying Strategies for Optimal Average Buy? Read also When To Sell? Strategy to sell shares to make more money
In closing, while writing this, I remember that Warren Buffett once mentioned this at Letter 2020.
That’s it dude. Please if you have comments or suggestions.
