Is the stock market a zero-sum game, or is wealth actually created in a bull market?

Answer 1

Except for new issues increase in trading price of a stock adds no new money to the capital stock of companies that are traded. The market provides liquidity for investors but does not create wealth. The wealth is created by the companies business activities which is reflected in the stock prices. When GDP is calculated either production or income are used, but capital gains are excluded because it represents an exchange of existing assets, that is a zero sum game.

Answer 2

The above answer is completely wrong. It's a simple issue --YES wealth is created in a bull market and even in a boring non-bull market. The total value of the US and world's stock markets are VASTLY higher than they were 30 years ago, even after correcting for mere inflation. At the same time, the total value of alternatives to stocks -- real estate and bond markets -- are also much higher. There is no comparable "loss" of value anywhere out there to justify belief in the zero-sum game.

Neither the amount of money nor the amount of wealth in the world are fixed at all, it's the very basics of Economics that that is not the case. Wealth is created and money is created all the time, and in complex interrelated financial relationships, much of that works its way into the stock markets. Obviously people lose money too, but on the whole the amount of new wealth in the markets over time far outstrips losses in the market.

Answer 3

Very Confucian question, with an equal number of answers. A bull market's wealth is partially real wealth creation through pure increased sales/profits, and partially the speculation borne by the continued growth of that phenom- in this sense, it is not a zero sum as all stocks experience pos. growth. The way to find out scientifically is to look at P/E ratios in average vs bull markets. This measures the "competitive premium" effect of a stock compared to its actual book value. In bull markets, nearly all stock PE's will go up at least somewhat- but remember this is in the context of a closed financial economy.

In a very absolute global sense, however, stock market trading is a zero sum activity. There is a finite amount of money in the world (adjusting for inflation of course), which owners must use to make rational trade-off decisions between 2 or more options. $1 spent here (this stock's gain) means by definition $1 is NOT spent there (that stock's loss).

Answer 4

I agree the first answer is wrong wealth it is created but not by the stock market by itself. The reason of the existance of a stock market is for the companies can get resources by getting new inverstors and for getting an equilibrium in the investment supply and demand between different companies, and investors, so the affrimation of the last answer that the value of stocks is greater than 30 years ago even taking inflation into account is true, The stock market is a place for stocks to be trade as every market is for, so thats why the stock market doesnt create wealth by itself but it helps the companies to be more efficient in getting funding so it helps companies to create more wealth.

Answer 5

The stock market in general is not a zero sum game but a positive sum game. Over time the stock market has averaged over 10% which is higher than the cost of borrowing money. So unlike poker where the money at the table is fixed and shuffled around from losers to winners, the pot of the stock market increases over time. This increase represents things like investments in knowledge, efficiencies in production, new technologies, etc.

Answer 6

Stock market wealth results from value creation in society. As long as there is value being created in the world, wealth creation follows.

Value is an abstract concept that people have a hard time getting their heads around. But, it's simple. Just think about the things you buy and why you buy them. Do you get value from them? Have those things changed over the course of your life so that you're getting more value from them?

Our distant ancestors probably spent 80% of their waking hours just trying to scrounge up enough calories to survive. Just in the last century, we've reduced that to a much smaller percentage - maybe 1-5%. That frees up a lot of time for us to do other things like take in a movie or sporting event or build a nice house. That's value.

Even more recently, value has been created. The survival rate of cancer patients is much higher than it was 30 years ago. That's good value. I can call for assistance on my cell phone if my bicycle breaks down when I'm 50 miles from anything. I couldn't do that 20 years ago. That's value. I can press a button on my new Scrubbin Bubbles shower cleaner and it coats the walls and keeps them clean. That saves me time. That's value.

So, as long as people can figure out ways to create more value, wealth there's more wealth to be created and it's not a zero sum game.

Break it down to a smaller scale. If you start a business that finds a way to add value to enough people's lives, the value of your business will increase and you have created wealth for yourself.