Why the Stock Market Is NOT a Zero Sum Game

So, in layman’s terms, the question is whether, over either the short or long term, does some party need to lose, for another to win? In other words, is it a win-lose relationship, or a win-win relationship (i.e: both parties win)?

Poker is an example of a zero sum game. The sum of the amounts of some players, will always equal the combined losses of the others.

While some types of trades are zero sum, due to the nature of the trade, the stock market itself is NOT a zero sum game. The other party isn’t necessarily losing, when you gain after the sale of a stock or other security. When an investor owns stock in a particular company, he shares ownership of that company, and this entitles the investor to a portion of that company’s profits (with respect to the amount owned, of course). Ultimately, the future direction of the stock will be based on how well the economy as a whole performs, the company’s fundamentals and other factors – the resulting profit or loss is not based on pure chance or the guarantee of another party’s loss.

However, contract based trading, such as that represented by options or futures, is indeed a zero sum game, since, only one party will gain on a specific contract.

Believing that the stock market is a zero sum game, such as poker or gambling, is a common misconception – in some cases, perpetuated by Hollywood, so most people just take movies or hearsay for granted (as truth). Don’t be one of those people 😊.

For more information about this topic, as well as game theory, economics and other background information please consult the following Investopedia article:
http://www.investopedia.com/terms/z/zero-sumgame.asp