I just wanted to respond to this, I think you're on the right track with stock markets. They are not zero-sum games. Real wealth is created - and lost - and in a growing economy everyone can make money since investors (by their very definition) are long stocks. As the value of the stocks they hold increase relative to the currency they purchased them with, they make money.
However, not all markets are stock markets. Stocks are a special type of financial instrument known as a security. A share of a company represents an ownership interest in said company. You can take your share of Coca-Cola and point to their bottling plant and tell yourself that you OWN a small portion of that bottling plant, and indeed you do. You own some part of all the company's assets and debts, and are entitled to enjoy the profits from the business whether that be in the form of dividends or stock price increases (or both). However, if the business goes belly-up you can at least take a tax write-off. But the key here is to remember that there is something REAL behind each share of stock, something is there to back it (unless your share of stock reads Enron or WorldCom, then you're in the tax write-off situation!!).
Things like derivative instruments, i.e. futures and options, are NOT securities. Their markets are also not like stock markets. There is no equity ownership in a company represented by a futures contract. By holding a stock option, you do not own the firm's assets or debts, and you are not entitled to dividends. You are, however, very happy to watch the stock price increase if you are long a call option and not so pleased if you're long a put. But unlike somebody who owns the stock, you don't get any say in voting for a board or directors until you exercise your call option and take delivery of the stock.
Getting back to my point, stock markets and futures markets are different entirely. Futures markets are a zero-sum game. The reason we have a stock market is to trade ownership interests in publicly-held companies. The reason we have futures exchanges is to pass price risk from hedgers to speculators. Hedgers are OK with "losing" in the futures markets because they'll recoup their losses in the spot markets leaving them with a wash-out. (Yes, I know this doesn't always happen and this is terribly over-simplified, but in an ideal world this would be the case). Hedgers are not out for ownership interests like investors are. So who wins when the hedgers "lose"? Whoever is on the opposite side of their trades! While the market size may grow over time, there are only so many dollars in play AT ANY ONE TIME that are available to be "won". Also, stocks do not expire unless a company goes out of business. Derivative products do expire at some point. If you hold a futures contract to expiration, you will be forced to do something (take delivery, make payment, etc.). You can theoretically hold a stock forever.
Let me break this down further. Let's look at a hypothetical futures market in which there is only one hedger and one speculator. The hedger will short a contract and the speculator will go long the contract. How many dollars have exchanged hands here? None! There was just an agreement made. When a contract is bought/sold, no dollars exchange hands. When I buy a stock, dollars DO change hands (along with shares of stock). You will have to post margin with your broker, of course, to enter into such a transaction, and each day your contract will be "marked to the market" and dollars will then flow in/out of the respective accts. Over time, the contract price will have gone up/down by a certain amount. Because there are a fixed number of participants in our hypothetical example, one party is going to win an equal number of dollars lost. The key here is to understand that there are only so many dollars available to be won or lost. Yes, there may be more participants later on, but at any given time there is a finite number of them with a finite number of dollars at stake. This is a zero-sum game. I do hope that I am making sense here, this IS an important point. If it is unclear please ask me to explain better.
Now, let's look at the forex markets. This market is certainly different that stock markets and futures markets. It's a spot market, meaning there are no contracts for future delivery - it's a transaction in the here-and-now. But like a futures market, this market is designed for something entirely different than equity owership. You can use the spox currency market to hedge and speculate. We are all speculators here (I am assuming). We want to accept risk in order to try and achieve higher returns than we could elsewhere. When you make a transaction in the forex market, you are going long one currency and shorting another. Someone else must take the EXACT opposite side - they go short what you have gone long and they go long what you have shorted. While in the stock market somebody must sell you stock in order for you to buy it, no one needs to SHORT you the stock. They can simply sell the stock to you in exchange for your dollars and they are OUT OF THE GAME. In this way, you can see that at any given time the amount of dollars CHANGES in the stock market but the amount of SHARES stays the same. There is always always always an ongoing contra position in FX and derivatives and this is what makes them all zero-sum games. When you buy Euros, remember you're selling something else. Somebody else is buying that something else and selling you Euros. You're both now tied together for better or worse - and if it's better for you than it is worse for the other party.
Finally, you commented that all of the players in a market provide value and that is how markets are non-zero-sum games. Well, kinda. Though speculators provide the liquidity needed for more efficient markets, this value does not change the basic fact that some markets are simply zero-sum games. The price of a stock can theoretically go to infinity. The only people making money in this situation are the folks who own the stock (or bought call options). Who loses? In this simple example, no one! But, if the price of the GBP triples tomorrow, does somebody lose? YOU BET! Anyone who was short the GBP will be looking for a bridge or high window to launch themselves from (just kidding). Since there's a contract position to each long GBP, somebody will win and somebody will lose and equal amount. This is a zero-sum game, and this does not depend upon the number of market particpants.
I hope this helps out - thanks for reading this if you got this far!!
-=DAVE=-
However, not all markets are stock markets. Stocks are a special type of financial instrument known as a security. A share of a company represents an ownership interest in said company. You can take your share of Coca-Cola and point to their bottling plant and tell yourself that you OWN a small portion of that bottling plant, and indeed you do. You own some part of all the company's assets and debts, and are entitled to enjoy the profits from the business whether that be in the form of dividends or stock price increases (or both). However, if the business goes belly-up you can at least take a tax write-off. But the key here is to remember that there is something REAL behind each share of stock, something is there to back it (unless your share of stock reads Enron or WorldCom, then you're in the tax write-off situation!!).
Things like derivative instruments, i.e. futures and options, are NOT securities. Their markets are also not like stock markets. There is no equity ownership in a company represented by a futures contract. By holding a stock option, you do not own the firm's assets or debts, and you are not entitled to dividends. You are, however, very happy to watch the stock price increase if you are long a call option and not so pleased if you're long a put. But unlike somebody who owns the stock, you don't get any say in voting for a board or directors until you exercise your call option and take delivery of the stock.
Getting back to my point, stock markets and futures markets are different entirely. Futures markets are a zero-sum game. The reason we have a stock market is to trade ownership interests in publicly-held companies. The reason we have futures exchanges is to pass price risk from hedgers to speculators. Hedgers are OK with "losing" in the futures markets because they'll recoup their losses in the spot markets leaving them with a wash-out. (Yes, I know this doesn't always happen and this is terribly over-simplified, but in an ideal world this would be the case). Hedgers are not out for ownership interests like investors are. So who wins when the hedgers "lose"? Whoever is on the opposite side of their trades! While the market size may grow over time, there are only so many dollars in play AT ANY ONE TIME that are available to be "won". Also, stocks do not expire unless a company goes out of business. Derivative products do expire at some point. If you hold a futures contract to expiration, you will be forced to do something (take delivery, make payment, etc.). You can theoretically hold a stock forever.
Let me break this down further. Let's look at a hypothetical futures market in which there is only one hedger and one speculator. The hedger will short a contract and the speculator will go long the contract. How many dollars have exchanged hands here? None! There was just an agreement made. When a contract is bought/sold, no dollars exchange hands. When I buy a stock, dollars DO change hands (along with shares of stock). You will have to post margin with your broker, of course, to enter into such a transaction, and each day your contract will be "marked to the market" and dollars will then flow in/out of the respective accts. Over time, the contract price will have gone up/down by a certain amount. Because there are a fixed number of participants in our hypothetical example, one party is going to win an equal number of dollars lost. The key here is to understand that there are only so many dollars available to be won or lost. Yes, there may be more participants later on, but at any given time there is a finite number of them with a finite number of dollars at stake. This is a zero-sum game. I do hope that I am making sense here, this IS an important point. If it is unclear please ask me to explain better.
Now, let's look at the forex markets. This market is certainly different that stock markets and futures markets. It's a spot market, meaning there are no contracts for future delivery - it's a transaction in the here-and-now. But like a futures market, this market is designed for something entirely different than equity owership. You can use the spox currency market to hedge and speculate. We are all speculators here (I am assuming). We want to accept risk in order to try and achieve higher returns than we could elsewhere. When you make a transaction in the forex market, you are going long one currency and shorting another. Someone else must take the EXACT opposite side - they go short what you have gone long and they go long what you have shorted. While in the stock market somebody must sell you stock in order for you to buy it, no one needs to SHORT you the stock. They can simply sell the stock to you in exchange for your dollars and they are OUT OF THE GAME. In this way, you can see that at any given time the amount of dollars CHANGES in the stock market but the amount of SHARES stays the same. There is always always always an ongoing contra position in FX and derivatives and this is what makes them all zero-sum games. When you buy Euros, remember you're selling something else. Somebody else is buying that something else and selling you Euros. You're both now tied together for better or worse - and if it's better for you than it is worse for the other party.
Finally, you commented that all of the players in a market provide value and that is how markets are non-zero-sum games. Well, kinda. Though speculators provide the liquidity needed for more efficient markets, this value does not change the basic fact that some markets are simply zero-sum games. The price of a stock can theoretically go to infinity. The only people making money in this situation are the folks who own the stock (or bought call options). Who loses? In this simple example, no one! But, if the price of the GBP triples tomorrow, does somebody lose? YOU BET! Anyone who was short the GBP will be looking for a bridge or high window to launch themselves from (just kidding). Since there's a contract position to each long GBP, somebody will win and somebody will lose and equal amount. This is a zero-sum game, and this does not depend upon the number of market particpants.
I hope this helps out - thanks for reading this if you got this far!!
-=DAVE=-
DislikedI really shouldn't bother with these theoretical discussions, but I always end up gritting my teeth whenever I hear this old, tired, FALSE mantra. Forex is NOT a zero-sum game. Markets in general, are NOT zero-sum games.
Do you believe that the stock market is a zero-sum game? You know that the NYSE has risen by an average of 12% per year since the Great Depression. Sure there have been down years and there are always occasional corrections/recessions/bubbles/depressions. But given enough time, the stock market just keeps going up. If the market is a zero-sum game, how is it possible for the overall market to keep going up over such a ridiculously long period of time? This would be analogous to every team in the NFL now finishing each season with a 90%+ winning percentage. (For comparison, the NFL, like all sports, IS a zero-sum game.)Ignored
