Is the Stock market a zero-sum game?

We keep hearing a lot that the stock market is a zero-sum game and on the face of it, it sounds logical as well. However, in this video, we will debunk this widely held belief with some real-life examples.

So the question at hand is whether the stock market is truly a zero-sum game?

First, what is a zero-sum game?

A zero-sum game is one in which one participant’s gain is at the expense of another participant’s loss. So, if you and your friend bet on a coin toss- it would be a zero-sum game. If you win, your friend will be a loser and if he or she wins, you would be the loser.

A similar analogy can be made about casinos and gamblers. If the casino wins, gamblers lose and if the gambler wins, the casino loses. Right?

The reason such games are called zero-sum is that at the end of the day if you add the profits made by the winner to the losses made by the loser, it would add up to zero.

So, the defining characteristics of a zero-sum game are that someone has to lose for someone to be a winner.

Now, the Stock market does sound a lot like a zero-sum game, doesn’t it? After all, every trade has a buyer and a seller and both of them can’t be right. If one is a winner, the other has to be a loser, right?

Well, not necessarily true.

Let’s take few real-life examples:

Mr. A bought a stock of Titan when it was trading at 5 rupees. When the stock ran up to 50, that is 50 times, he decided to sell his shares and the buyer of those shares was Mr. B. Now, Mr. B was just as patient as Mr. A and saw Titan’s shares soaring to 200 rupees. So, he decides to sell the shares at 200 rupees. And this goes on and on.

So, in this story, who’s the loser? Well, nobody. Everybody is a winner in this stock as long as Titan’s growth story continues.

On the other hand, take the example of Unitech where almost every investor lost money. Buyers had to keep selling their shares at lower and lower prices. There were no winners and only losers.

What does it all mean then?  

See, the classic mistake people make is that they think that shares of a company are just the same as a coin in the coin toss or those chips in the casinos and that’s where the whole confusion starts.

The reality is that a company’s stock is very much a living, breathing entity. It can bring more money in the market OR it can suck money from the market depending on the company’s financial performance.

If the stock is that of a financially strong company, it makes everyone richer. So, the winning investor is not getting richer at the expense of someone else, he’s getting richer because the company has made more profits and those profits are reflected in the share prices.

Similarly, the stock of a fundamentally weak company makes every investor poorer. They are not getting poorer because someone else is profiting but because the company is losing money and that is reflected in the share prices.

A better analogy is that of a train, where people get on and off at every station but everybody reaches their destination as long as the train is on the right track, but if the train is on the wrong track, everyone will be in trouble.

So, the answer is NO. The stock market is not a zero-sum game. It can be a positive-sum game for investors of good stocks and a negative-sum game for investors of bad stocks. Can we at least agree that at the very least it’s more complicated than the game of coin toss?

One last thing.

There is a zero-sum game also in the stock market and that is in derivatives, i.e. Futures and options, but we will discuss that more in the derivative videos.

Alright, guys, I hope we have successfully debunked the myth of the stock market being a zero-sum game. Also, if you’re new, go ahead and subscribe to the channel because we are making this channel India’s biggest online library of stock market videos. Stay tuned. 

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