Recently updated on: September 20, 2023
The stock market is an excellent way to generate wealth. It is also a great equalizer because it opens opportunities to almost everyone. However, it is often thought to be a zero-sum game.
A Zero-Sum Game in Game Theory means that one person's gain equals another person's loss, resulting in a net outcome of zero. Simply put, one man's gain is another man's loss, and vice versa.
So, based on this definition, the best example of a zero-sum game is gambling, like poker, because the total amount the winner won will equal the total amount lost by the other players. Chess and rocks, papers, and scissors are other good examples.
Based on this general principle, let's look at game theory and how we can make sense of it in the stock market.
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Is the Stock Market a Zero-Sum Game?
The stock market is frequently considered a zero-sum game. This is something that I heard a while back, but I haven't taken the time to think about it or if it is true.
Looking at the description above, it appears that the stock market does not fully satisfy the case that for every winner, there must be a loser.
Because at the end of the day, once the dust settles, the total amount won and lost is not equal to zero - which typically happens in the stock market.
So, the definition of a zero-sum game does not fit the mechanics of a stock market if you consider the other variables.
So, technically, the stock market is NOT a zero-sum game.
Why Do People Consider the Stock Market a Zero-Sum Game?
Now that we understand that the stock market is not a zero-sum game, it is still worth looking into why many people think of it that way, and it is easy to understand why.
Looking back at the definition, a zero-sum game must have a winner taking the stakes of the loser, with a net sum of zero, hence, the name "zero-sum."
If you are trading or investing in the stock market, you may have won or lost money through your trades. So, if you won a trade, then whose money did you get?
Likewise, if you lost money, then where did it go? In a losing situation, it is easy to think that because I lost money, someone took it from me, right?
Here are some examples to better understand where the zero-sum game of the stock market is coming from.
For instance, you bought Jollibee ($JFC) shares at the bottom of the 2020 Stock Market Crash at P100 per share, and you sold it at P250 for a 150% gain after two years.
The added P150 to your name didn't appear out of thin air. The money you gained is from another trader or traders who thought $JFC was still undervalued at P250.
On the other hand, if the $JFC stock that you hold drops lower than P250, say P125 per share, then it is 50% lower than your initial buying price.
Another example is the crypto space, including the sh*t coins that many "investors" love buying.
For instance, a very lucky trader bought a Bitcoin (BTC) for $5,000 and sold it for $60,000. That seller has already gained more than 1,000% in profit.
However, if we look at the other side of the picture, the buyer who bought the Bitcoin at $60,000 is almost 66% down (-66%) after Bitcoin crashed to $20K.
This means that the money you lost (even though it is only paper loss) is still a gain of another trader since he realized it.
Based on these two examples, we can see that there are winners and losers. However, the decision to buy or sell the stock (and Bitcoin) is not entirely based on a hunch but on future expectations, which, in turn, can be equally beneficial to both the buyer and seller, especially in the longer term.
Remember that the stock market represents businesses that produce products and services, create jobs, pay dividends, and more.
So, there are various considerations and variables that will decide the stock's future price, especially if you are looking at the fundamental perspective, which is why the stock market is not a zero-sum game.
A zero-sum game is an event or situation where one person must lose before someone wins. So, even though the stock market may appear this way, it is still, technically, not a zero-sum game.
The stock market is a great equalizer and an opportunity for more people to earn. So, if you're hesitant to invest in the stock market because you feel like you're taking other people's money, don't be.
Capital appreciation is only one way to earn in the stock market. You can also earn dividends. So, what are you waiting for?