This is an interesting question. By debating the answer to this question, it is a good way to get an insight about how the stock market works.
What is zero-sum game?
Zero-sum game means one party’s gain equivalent to another party’s loss, and total value with the system remains unchanged. The sum of all transactions is always zero.
Think about stock market. For a transaction to happen, there must be a buyer and a seller. Below is a typical day end summary of stock market, which shows bought value equivalent to sold value, and the net sum is zero.
With net sum being zero, this must be a zero-sum game right? No. To recap definition of zero-sum game, “one person’s gain equivalent to one person’s loss, and total value remains unchanged”. Is bought/sold value equivalent to gain/loss? No.
Then let’s the debate begins!
From traders point of view
1. For traders, it is not a zero sum game but a negative sum game. Why? Because both buyer and seller has to pay a transaction fee to brokerage firm. Taking this into consideration, net sum is always negative. It is negative sum game !
2. The thought of zero or negative sum game matches the strategy used by traders. Traders have to predict the movement of their opponent to win the game.
3. Understanding of market sentiment and market force (supply & demand) is important for traders to win the negative sum game. A high level player not only do prediction, but also manipulate market sentiment and force.
4. Trading involves short term strategies, ranging from hours, days to months. Within short period of time, growth in economy is so negligible compared with ups and downs of share price in the market.
From investor point of view
1. Stock market is an open system, but a closed system. Over the long term, the pie size of economy will always get bigger, GDP contraction is a very rare event. With more shares issued and more capital flowing into market along with economy growth, the value of share market will continue to grow. So it is a positive sum game ！
2. The idea of positive sum game makes investors to study and understand the business of a company, and invest in the company that will ride with the wave of economy growth.
3. Ability to read financial reports and understand business of a company is a skill that must be equipped by investors.
4. Investor is believer that economy will always be growing in the future. Despite short term market fluctuation, market will eventually reflect the economy growth in future. So investors are normally having long term strategy.
5. One missing piece that normally not considered by traders is dividend. Dividend is additional value created by stock market typically not considered in the formula of zero-sum game.
Extended reading: Ultimate guide for dividend investing
Summary
There is no right or wrong about being traders or investors in stock market. What has to be avoided, is claiming to be investor but act like trader, or vice-versa. Like what Warren Buffet has said, “Risks comes from not knowing what you’re doing“.
So are you a trader or investor?
The definition is not wrong, but not entirely correct. In your article, “one person” or “one party” is often referred to. This game theory is ruled by gain or losses of all participant, not one. Probably just your phrasing:)
Also, the sum of transaction is not zero. It is NOT. It is the aggregated losses or gains that balanced and become zero.
First pointer, is it right to consider transaction fee in this ruling? Then how about US that doesn’t needs brokerage fees now?
Hello Yiki
First of all, thank you for leaving a comment. Always good to exchange opinion with different people.
Sorry that English is not my primary language so my words and phrases used might not be perfect to express what I actually meant @@
With regards to transaction fee, in my opinion that is no definite answer whether it should be considered or not. Investment is not science, everyone could have their own interpretation, and it is possible for people to have completely different strategy/opinion but both succeed. 🙂