This was proposed to me by a left-leaning friend of mine, he likens it to a game of poker.
I'm a little confused and I don't admittedly know much about it myself. He claims that because with stocks there is no value actually created in trading, unlike the real global economy, it is a zero-sum game.
Thoughts? Sorry if you have answered this before.
He claims that because with stocks there is no value actually created in trading, unlike the real global economy, it is a zero-sum game.
Your friend shows a fundamental misunderstanding of the nature and role of the stock market.
Investors buy stocks (claims of ownership over that firm) for a myriad of reasons, but the primary reason is because they wish to be part of that company and desire a claim to that firm's future profits (takes the form of dividends). Firms choose to sell claims of ownership (stocks) because they need additional resources in order to fund R&D projects, purchase new and more productive capital goods (which will elevate the productivity of labor and therefore real wages), ect. This market transaction, like all market transactions, is mutually beneficial (ex ante) and therefore constitutes a positive-sum game.
Now it is true that investors, often referred to as "speculators" (though all entrepreneurial endeavors are inherently speculative), purchase and sell stocks in secondary markets because they believe that those assets are either overvalued or undervalued, and hope to earn a capital-gain/avoid capital-losses. In this situation, one party will be right and one party will be wrong. At a superficial glance, this aspect of the stock market appears to be a zero-sum game, but the buying and selling of assets based on expected valuations actually leads to the efficient pricing of those assets (sets the prices of those assets in accordance with actual fundamentals).
This tells the market the true value of a firm and its assets, which provides vital information for other investors and financial institutions. This process may reveal, for example, that a firm has bad managers who are inefficiently employing the scarce resources entrusted to them, and this will lower their stock prices, which, in turn, will allow a more efficient firm to come in, buy the company at this cheaper price, replace management, and use those resources more efficiently.
All of this indirectly serves the needs of consumers and assures optimal allocation of scarce resources. Additionally, there are times (often referred to as "bull markets"), where there are more who wish to buy rather than sell due to general economic growth and productivity gains. This will cause the valuations of stocks in the stock market to rise in the aggregate. This situation is clearly a positive-sum game, again in the aggregate (most individuals are making capital gains, and/or most firms are offering higher rates of return [dividends]).
But your friend is at least partially right in one respect. The stock market is unlike other markets insofar as it does not aim at the direct satisfaction of the subjective values of consumers (doesn't produce final goods and services); it satisfies such values indirectly by funding the firms that actually produce final consumer goods.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
A stock is an investment in an entrepreneurial project. Thus stocks can generate dividends. Trading in stocks has to do with how much dividends people expect to get for it. People can speculate on this and win or lose money. Trading happens because people subjectively value higher what they get than what they give up. So both stocks themselves and stock trading is highly entrepreneurial.
Mises said that a capitalist economy is signified by a stock market.
Learn more about the stock market:
http://www.vforvoluntary.com/young-economist/59-chap14.html
I understand all of that, but his point that he was trying to stress to me is that in the stock market if somebody wins, somebody else must nessicarily lose. He also stressed to me that in normal trade the process is much different, and that two people can benefit from a transaction and add value to the economy. (Which is obviously true)
I'm just wondering if there's any validity to this.
I don't see any point in investing in the stock market when you can just buy gold. Also, in a free society, it would be hard to gain from the stock market as well as pointless to invest in the stock market due to deflation.
No, because the stocks are from companies which get their money from the economy, so as long as the economy grows so can stocks. Stocks can also go down when the economy is doing bad. One of the best way to tell the value of a stock is to look at their dividends paid over the last couple of years. So their is a value to stocks, think of them as banks, the stock price is the loan, and dividends are interest.
s0beit:in the stock market if somebody wins, somebody else must nessicarily lose.
How?
There are no traders in here...ask this on a stock trading forum.
claudius:There are no traders in here
And you know this because...
When two people play a hand of poker there is a winner and a loser. One winds up with more money than before the game, the other with less.
When A buys a stock from B, there are many possible outcomes. B cannot be called a loser by any means, because he got what he wanted, money right now. What happens to the stock values afterward has nothing to do with him. Even if it rises right away tenfold, he didn't lose anything; he merely could have gained and didn't. So much for B, who always wins.
What about A? If the stock goes up he wins also. If it stays the same but pays a dividend, then all other things being equal, he again wins. If it drops in price, yes, then he loses.
But let us ask ourselves this. Put aside the stock, which is a piece of paper. What A did was buy part ownership of a business. If he had bought into the local Mom and Pop grocery, I assume there would be no nosensical talk about zero sum games, because it would be an action in "the real global economy" where "value is actually created in trading" [whatever that means].
Buying a stock is identical to buying the local Mom and Pop grocery. There is real land, real buildings, real workers, all working hard to make real money for the owner, the stockholder.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Esuric:the buying and selling of assets based on expected valuations actually leads to the efficient pricing of those assets (sets the prices of those assets in accordance with actual fundamentals).
Backup support:
The social function of
s0beit: He claims that because with stocks there is no value actually created in trading, unlike the real global economy, it is a zero-sum game.
Values are subjective. Every voluntary exchange creates value for both participating parties, by definition. A voluntary exchange of stock for currency (or vice versa) is no different in any way whatsoever. A world of agents participating in voluntary exchanges has no responsibility to create anything that may or may not be subjectively valued by your friend.
s0beit: I understand all of that, but his point that he was trying to stress to me is that in the stock market if somebody wins, somebody else must nessicarily lose. He also stressed to me that in normal trade the process is much different, and that two people can benefit from a transaction and add value to the economy. (Which is obviously true) I'm just wondering if there's any validity to this.
If someone buys a stock at 50c and then sells it at $10. The person that buys it at $10 might hold on to that stock until it reaches $50. So there can be mutually beneficial trades on the stock market.