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Where does the money come from?

  • #41
  • Jan 24, 2007 1:04am Jan 24, 2007 1:04am
I too have pondered where the money comes from & goes. Here's my take... two teams show up for a hockey game ... there will be a winner, there will be a loser ... both teams know this. Both teams try to win, but one loses... end of story. Either way, both teams go on to play another day.

Forex is the same. Two players show up, one who thinks the price will go up, the other thinks price will go down. One wins the other loses. Both are willing participants of the game. The referee gets 3 pips for making the game happen.

How's that for a Canadian perspective?

Mark
  • #42
  • Jan 24, 2007 2:31am Jan 24, 2007 2:31am
Quoting narafa
I would be really surprised if this is the case. Why do they hire all those MBAs, CFAs then???

Thanks,

Nader
just because you have a standard finance degree doesn't mean you're great at trading. If I get a PHd in english does that make me a best-selling author?
  • #43
  • Jan 24, 2007 8:46am Jan 24, 2007 8:46am
I think this thread is the most convoluted blob of horseshit I have ever read.

Forex IS a zero sum game. All markets are zero sum. Some of them just have a more abstract method of price discovery.

The money you make comes from someone who lost.

Who lost is irrelevant since half the time the loser will be yourself.

Trading is moral because all participants are willing. In fact your providing the losers and winners with an important service; the ability to trade.

Money is made from cotton, not wood.

Borrowers print money, not governments. If you dislike fiat currencies, stop taking out loans.

There are probably half a dozen other nonsense ideas expressed in this thread, but I have already wasted too much of my life on it. This thread is like two years old. Put it back to bed and focus on getting out of the 95%.
  • #44
  • Jan 24, 2007 8:48am Jan 24, 2007 8:48am
couldn't have said it better myself Darkstar!
Therefore what??
  • #45
  • Jan 24, 2007 11:04am Jan 24, 2007 11:04am
That is correct..but still not sure..if borrowers print money..then how is goverement able to manage some of its currencies..example China..no matter how much you borrow that stuff..it ain't gonna move.

The whole world wants yuan to go up..but Chinese government does not allow it to appriaciate..untill it decides too..slowlly inch by inch.

No one trades yuan though...yet everyone knows..China will be a great economic power in the coming decades.
  • #46
  • Jan 24, 2007 2:20pm Jan 24, 2007 2:20pm
Quoting Darkstar
Forex IS a zero sum game. All markets are zero sum. Some of them just have a more abstract method of price discovery.
All markets? I'm fairly certain that stock markets are NOT zero sum.
  • #47
  • Jan 24, 2007 4:23pm Jan 24, 2007 4:23pm
None of the markets are Zero-Sum game, because of bid and ask spread, Zero sum would imply that what person A loses B receives (exact amount) but it's never the case because of commisions or spread or both, middle man always gets the slice, so its a minus sum game for traders.
  • #48
  • Jan 24, 2007 4:27pm Jan 24, 2007 4:27pm
Quoting mickeymickey
All markets? I'm fairly certain that stock markets are NOT zero sum.
Like I said, some markets are just more abstract in their method of price discovery. There was a recent discussion on this exact subject about a week ago. Dig through my posts and you'll find it...
  • #49
  • Jan 24, 2007 4:28pm Jan 24, 2007 4:28pm
Quoting lexazver
None of the markets are Zero-Sum game, because of bid and ask spread, Zero sum would imply that what person A loses B receives (exact amount) but it's never the case because of commisions or spread or both, middle man always gets the slice, so its a minus sum game for traders.
True enough, but that just makes it more complicated to understand.
  • #50
  • Jan 24, 2007 5:06pm Jan 24, 2007 5:06pm
Quoting Darkstar
I think this thread is the most convoluted blob of horseshit I have ever read.

Forex IS a zero sum game. All markets are zero sum. Some of them just have a more abstract method of price discovery.

The money you make comes from someone who lost.

Who lost is irrelevant since half the time the loser will be yourself.

Trading is moral because all participants are willing. In fact your providing the losers and winners with an important service; the ability to trade.

Money is made from cotton, not wood.

Borrowers print money, not governments. If you dislike fiat currencies, stop taking out loans.

There are probably half a dozen other nonsense ideas expressed in this thread, but I have already wasted too much of my life on it. This thread is like two years old. Put it back to bed and focus on getting out of the 95%.
Thanks for your comment DS, yes I know that all are willing to play and are playing consciously. But if you are a boxer and a not bad one you can hit and harm someone, all are willing to participate thats not a street fight but the problem remains.

Imho playing is not immoral and certainly occasionally its a kind of service to hedgers and banks. On the other hand i see a pictore of a friend of mine who lost 8 k lately, yes he is conscious person (i think ) and i'm not responsible for his loss and him.

maybe my problem is of emotional nature, i'll try to think about it. Any comments welcome.
Quidquid latine dictum sit altum viditur
  • #51
  • Jan 24, 2007 7:37pm Jan 24, 2007 7:37pm
Quoting Darkstar
Like I said, some markets are just more abstract in their method of price discovery. There was a recent discussion on this exact subject about a week ago. Dig through my posts and you'll find it...
Well I found your one post on the stock market, and I have to disagree with a few statements you made. First off, I feel that pointing to opportunity cost as a loss does not make the stock market a zero sum game. I'll acknowledge that the opportunity cost is there (although not in the same way), but I feel it is somewhat useless at proving a zero sum game. My main reasoning for this is that by including opportunity cost as a loss to other parties, you include the losses of participants when they were still non-participants in the game/market.

To expand on this, I'll build on the earnings report example you gave in the other thread. If the earnings report comes out better than expected, you are able to sell your shares at a price higher than what they originally cost you.

Your argument is that the purchaser of these shares has a loss in the opportunity cost of not purchasing them sooner. I have two problems with this, the first being that new buyers were not previously participants in the game/market, the second being that there is no true opportunity cost to all buyers as you put forth.

The problem here is that the purchaser of stock shares after a positive earnings report was not a participant in the market prior to the earnings report. He had no position in the stock prior to the earnings report and he was not yet a participant in the game/market for a specific stock. For that reason, there is no loss to counterbalance your gain.

Additionally, opportunity cost as I understand it only applies to current alternatives one can pursue, not past opportunities that were missed. It is true that there is an opportunity cost to everyone considering a purchase or holding a stock. But this opportunity cost is in the future, not in the past. It's incorrect to label a potential past purchase as an opportunity cost to a present buyer, unless that present buyer was considering the purchase at that time and had chosen some other alternative.

It is not the case that every buyer of a stock valued at $90 was considering purchasing the stock 5 years ago when it may have been $45. If one were to believe that every market participant has had an opportunity cost in past advantageous prices, then one would have to accept that the stock market is a non-zero sum game, as the combined losses of many opportunity costs would be greater than all potential gains. If one did not believe this, then they would still have to conclude that the stock market is a non-zero sum game, as there are no opportunity losses counterbalancing gains made through higher valuations of stocks.

I also have an issue with this statement:

Quote
If every man, woman, and child on the earth suddenly decided that owning stock would cause them to die in 1 minute, every share on every exchange would instantly be valued at $0. Unless or until you can resolve that problem, you are participating in a zero sum game.


I don't feel this statement provides anything useful in identifying zero sum games, and if it does I don't think you've made it clear. Of course anything causing death will have no value and be considered worthless, but that says anything about zero sum games. The real question is if the net losses of every share of stock in the world plummeting to zero would be equal to all the money that had been invested in stock markets. I don't think it would be.

I hope what I said has been clear, I've read through this a few times to make sure it was understandable.
  • #52
  • Jan 24, 2007 9:52pm Jan 24, 2007 9:52pm
Quoting mickeymickey
I don't feel this statement provides anything useful in identifying zero sum games, and if it does I don't think you've made it clear. Of course anything causing death will have no value and be considered worthless, but that says anything about zero sum games. The real question is if the net losses of every share of stock in the world plummeting to zero would be equal to all the money that had been invested in stock markets. I don't think it would be.
You put together a well reasoned argument given the information at hand. The failure was on my part in explaining the concept.

It's not so much an opportunity cost to the purchaser as it is a movement of money in and out of the market. The purchaser example was an attempt to explain a rather abstract concept. Let me see if I can do a better job.

Because the markets are so large, it is easy to assume that prices move on their own; but they don't.

You can think of the stock market like a big jar. Until water (money) moves into the jar it has no value. As more water is poured into the jar its valuation increases. The jar is of infinite size so it can continue to increase in value so long as there is water being put into it.

When a stock market participant makes paper profits (those which have yet to be extracted from the market) he is basically watching water move into the jar. This feels good, and so long as nobody removes any water the process will continue and the paper profits will expand for everyone. When he takes his profits (moves into cash) he is extracting some of the water from the jar leaving less then has been put into it over time.

Just because the participant originally put in 2 cups of water and managed to extract 4 cups at a later date doesn't mean it was free money. He made a profit, but the profit wasn't magically created inside the jar. It was taken from a participant who has yet to extract any water. If all the participants extracted their profits at the same time, the value would return to zero. Those that removed their money at the slowest pace would pay for those that removed it faster.

The difference between Forex and stocks is only a function of time. In Forex the gains and losses are netted out every 3 days. In stocks they (hopefully) will never be netted out, but that doesn't mean they won't given a long enough timeline. If you totaled all the money that has ever been put into the stock market, added the current value of all the stocks, and then subtracted all the money that has ever been pulled out, the value would equal zero. Zero sum game.

I realize the value would be negative due to transaction costs and the like, but you get the point. Any market. I repeat ANY market in which an extraction of all the currently invested capital would drive the value of the underlying assets to zero is a zero sum game. That includes stocks, bonds, real estate, cars, gumballs, and any other product valued through supply and demand. The hard truth is every market is zero sum. Some of them are just more abstract in their price discovery.

Hope that makes a bit more sense.
  • #53
  • Jan 24, 2007 10:14pm Jan 24, 2007 10:14pm
Current capitalism system allows the creation of money out of thin air. Whenever the growth of money exceeds the growth of population plus productivity, inflation is created. All markets will keep going up as long as there's still continual growth of money. The reverse will apply if money supply drops. That's all about it. Just my opinion.

The example of this: US Money Supply table at http://www.econstats.com/M/mnea5.htm. It's the main reason dow index grew from hundreds to over 12k now.
Tra-X
  • #54
  • Jan 24, 2007 10:22pm Jan 24, 2007 10:22pm
Quoting dottore
I stopped trading a month ago due to that. I dont know who is on the other side and I don't want to harm anybody. I didnt solved this problem yet. Any comments welcome.
Sounds like if you knew from whom you had taken the funds sent you a PM requesting the funds be returned, you would say OK. Would you expect the same grace? I think not. Therfore, you both played the game knowing the rules and you won the cup. Do you really want to give it back because They seem hurt by losing?

You Won ! ! Celebrate ! !

Or, if emotions run rampant, as you have intimated, Stop Trading. This is a cutthroat business.
  • #55
  • Jan 24, 2007 10:53pm Jan 24, 2007 10:53pm
Keep in mind that the majority of brokers out there have a dealing desk and trade directly against you, assuming that you will be part of the majority that loses your account. So to answer you question, it is a good possibility that the person losing on the other end is your broker.
hikerbiker25
  • #56
  • Jan 24, 2007 11:33pm Jan 24, 2007 11:33pm
Aaron Lowry said...
"Keep in mind that the majority of brokers out there have a dealing desk and trade directly against you, assuming that you will be part of the majority that loses your account. So to answer you question, it is a good possibility that the person losing on the other end is your broker."

That's the same guy that wants to Take Your Money ! ! !
Doh ! ! !
  • #57
  • Jan 25, 2007 4:05pm Jan 25, 2007 4:05pm
Well Darkstar, you make a sound argument, though I'm still not convinced that the stock market is zero sum.

Quote
I repeat ANY market in which an extraction of all the currently invested capital would drive the value of the underlying assets to zero is a zero sum game.


I don't feel this statement proves anything about the stock market being a zero sum game. With no demand everything has a value of zero, that is true. The problem here is that this hypothetical is divorced from reality. If there were simply no demand for a stock, it's share price may plummet to zero, but it doesn't impact the underlying assets at all.

The underlying assets are the assets of the company not the shares of stock, and these assets don't change in value according to the supply and demand in the stock market. The right of common stock shareholders to exert control over these assets creates an intrinsic value to stocks, since even in the worst case scenario, shareholders can vote to dissolve the company and distribute the assets.

Also, I don't see any point in your line of argument with assuming there is zero demand for something. You're illustrating that value is based on supply and demand, and without demand there is no value. The question is not whether something will have no value, but whether or not all the gains and losses equal zero. I'm not convinced that the possibility of an instant drop to zero proves this.
  • #58
  • Jan 25, 2007 4:37pm Jan 25, 2007 4:37pm
Quoting mickeymickey
Well Darkstar, you make a sound argument, though I'm still not convinced that the stock market is zero sum.



I don't feel this statement proves anything about the stock market being a zero sum game. With no demand everything has a value of zero, that is true. The problem here is that this hypothetical is divorced from reality. If there were simply no demand for a stock, it's share price may plummet to zero, but it doesn't impact the underlying assets at all.

The underlying assets are the assets of the company not the shares of stock, and these assets don't change in value according to the supply and demand in the stock market. The right of common stock shareholders to exert control over these assets creates an intrinsic value to stocks, since even in the worst case scenario, shareholders can vote to dissolve the company and distribute the assets.

Also, I don't see any point in your line of argument with assuming there is zero demand for something. You're illustrating that value is based on supply and demand, and without demand there is no value. The question is not whether something will have no value, but whether or not all the gains and losses equal zero. I'm not convinced that the possibility of an instant drop to zero proves this.
[/color]
It doesn't make sense because you falsely assume that stock prices are set by the hand of God to equal some intrinsic value. Do some research on what happens when a publicly traded company enters chapter 7. I think you'll be extremely surprised at what the intrinsic value of a stock really amounts to.
  • #59
  • Jan 25, 2007 4:55pm Jan 25, 2007 4:55pm
Quoting mickeymickey
If there were simply no demand for a stock, it's share price may plummet to zero, but it doesn't impact the underlying assets at all. [/color]
I missed this the first time through. Your right it wouldn't and thats precisley why it IS zero sum. The value of a stock has nothing to do with the value of the company it is meant to represent. The stock price is purely determined by the market capitalization devided by the number of outstanding shares. A market capitalization is simply the value of all the investor funds that are invested in that stock at that moment in time. As funds move into and out of the stock, the market capitalization changes and the aggregate value of each share will rise or fall respectivly. A stocks market capitalization is akin to the jar of water in my earlier example.

This being the case, you can only make money by holding a stock while more money is flowing into the stock(or shorting it as money flows out). When you pull it out the aggregate value of each share drops by the amount you removed from the jar. Your profit was derived from an aggregate loss to all the investors still invested in the stock.
  • #60
  • Jan 25, 2007 5:24pm Jan 25, 2007 5:24pm
Quoting Darkstar
It doesn't make sense because you falsely assume that stock prices are set by the hand of God to equal some intrinsic value. Do some research on what happens when a publicly traded company enters chapter 7. I think you'll be extremely surprised at what the intrinsic value of a stock really amounts to.
I assume that stock prices are set by supply and demand based on the performance of a company. Likewise, the assets of a company have value based on supply and demand outside of the stock market. Chapter 7 illustrates my point perfectly. The net assets and the performance of the company determine price. Did I not say as much in my post? I'm not sure where I indicated anything about the hand of God, I'd appreciate it if you kept such silly statements out of this discussion, because I believe I've said anything but that in my last post.

Let me reiterate my point. You argued that in some unreal hypothetical case in which all capital is removed from the market, the underlying assets will decline to zero. You did not specify the conditions of this happening, such as Chapter 7 bankruptcy. You stated that the decline of the underlying assets (caused by removal of investment capital) to zero proves that it's a zero sum game. I disagree, because the company is the underlying asset and it will still be worth something greater than zero even if a share of its stock is equal to zero because you will die in the next minute from owning a stock.

If you want to discuss realistic scenarios such as Chapter 7, then bring up that when trying to prove your point. The "death in a minute" and assumed zero demand scenarios really aren't working for me.
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