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Economics/stock market: zero sum?


QUESTION: I'm know (perhaps "convinced" is a more accurate description) that global economics is not zero-sum.  Likewise, wealth is not zero-sum, and that the options market is in fact zero-sum.

Some people say the stock market is not zero-sum because some companies distribute dividends, and their claim this by doing so the stock market isn't zero-sum.  However, I've also read this argument is fallacious because they say every company that distributes dividends ends up reducing its stock price by exactly the amount of the dividend distribution.

So my question is, can you offer a clear, air-tight argument one way or the other, whether or not the stock market is zero-sum?

As a side question, if I were to rephrase the question, "If the stock market only consisted of non-dividend stocks, would that market be zero-sum?", would it change your answer?

ANSWER: The options market is only zero-sum if the people do not exercise their options.  When exercised, the value of the options exchange is entirely dependent on the value and price exchange of the underlying asset within the context of the portfolio strategy being utilized by each party in the transaction, which means it needs to be calculated on a case-by-case basis.  Just as a simple example, you can sell a covered call option and then reinvest those revenues, generating a return until the exercise date, then even if the person exercises that call option, you can still have made money both on the equity sale as well as the reinvested returns, while the other person makes money by buying equities below current market price.

Hopefully this helps!  

---------- FOLLOW-UP ----------

QUESTION: My question was whether the stock market (not the options market) is zero-sum.  Is the stock market zero-sum?  If your answer is "yes," then would it still be zero-sum if the stock market only consisted of non-dividend stocks?

The stock market is not necessarily zero-sum, either but, as with options, it needs to be taken on a case-by-case basis.  Think of it like this - each business and consumer exchange is generally mutually beneficial and, stockholders, being the owners of the company, are the ones to benefit from the exchange on behalf of the company.  A person who sells a stock for more than they bought it for will experience a net gain, and the person they sold it to might also experience a net gain as the stock continues to grow.  That growth in value occurs in the form of both dividends as well as increases in share price, both of which are caused largely by company value in the short-run, and almost entirely by company value in the long-run.  So, as the company continues to grow, those who buy into the company will continue to experience gain, regardless of how many times that stock changes hands.  It would only be zero-sum if people sold the stock for the exact same price they bought it for.  To further exacerbate, then the funds generated through the first investor's return on investment can then be reinvested, perhaps into a new initial public offering, thereby further increasing the ROI on your net earning assets.


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Michael Taillard


Accepts most economic questions


Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

American Economics Association

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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