Your Gain is Another’s Loss
In a recent USATODAY.com a reader asked, “When a person loses money in the stock market, does that always mean another person is winning? Is the stock market simply like a casino where one man’s lost is another man’s gain?”
“Professional investors never like the stock market to be described as a gambling hall. After all, investors never like to think of their investment success as being the result of luck. But the fact of the matter is that there are many parallels between short-term speculation in the stock market and gambling. Short-term speculation on any market is essentially a game of random chance. If daytraders make a bet on a stock, they’re essentially guessing the stock will either go up or down. Since there are two outcomes, the odds are 50-50 that the stock will go up or down. That’s exactly the same probability of hitting heads in a fair flip of the coin. This is assuming the market is efficient and that the investor does not have valuable inside information about the stock. And to answer your question directly, yes, if you sell a stock for a gain, that was a loss for someone else. Remember that there are only a certain number of shares outstanding of any company. That includes every company ranging from General Electric to XM Satellite Radio. If you buy shares, someone on the other side of the trade is selling them to you. If the stock rises after you buy it, you have taken a gain that would have belonged to the investor that sold the stock to you. Similarly, if the stock falls after you buy it, you are absorbing a loss the previous investor would have taken. But that doesn’t mean investing is a zero-sum game. Statistics tell us that investors who invest in a diversified basket of stocks for the long-run almost always profit. During the 10 years between 1995 and 2004, the broad Standard & Poor’s 500 index rose 12.1% on average per year, says IFA. So even though many investors won or lost on individual stocks during that time, the investor who owned a broad basket of stocks and held on to them would have enjoyed a nice gain.”
Matt Krantz
Financial Markets Reporter at USA TODAY
I think the author makes most of the points about zero sum right on, but he misses some elements. All in all one of the better comments on the subject.
For more on the zero sum game read the zero sum whitepaper by Larry Harris and Chapter 3 of the book Trend Following.
