People say that the share market is a zero-sum game, some people lose and some people gain. So there are only 2 people on the net, some people will lose and some people will gain. This is very small though and it’s not like that. Share market is not completely a zero-sum game and here I will explain why we can’t consider it is not a zero-sum game.

What is the share market?

Share market is a place where the worth of the companies for the worth of stocks is shown as a price to you. It means a place where the stocks prices are displayed and the mechanism to calculate the prices are through buyers and sellers. The buyers enter because they feel that the stock might go up and they buy and the sellers feel that the stocks might go down and they sell.





This entire mechanism is set in such a way that, if anyone wants to money in a company’s stock or want to take out their money then they can use this mechanism very well. But some people say that the rich people money through this mechanism and people with less money lose money. It’s not about rich or poor it’s about whoever is more smart earn money, and those who do not put in a lot of effort lose money. A zero-sum game means that someone will lose and someone will gain so it’s all the same.


If we distribute the share market in two parts. Then one is the cash market, where the work on delivery. It means that you own the share and that share is in your Demat account.


The other is the speculative market, which is known as the derivative market.

These are two very different markets and we need to see these in a different context for zero-sum games.


Cash Market


Where we actually take delivery of shares and are added to your Demat account.

What is share and why do the prices increases?





Whenever a company is into a business then they make a profit through that business. Till now profit was one of the biggest objectives but after the Zomato IPU, even that is not a requirement for anyone. But ultimately the profit that the company generates is the biggest objective of the company. That profit is either distributed as a dividend to the shareholders, are the owners of the company or it is retained by the company to be used as a future growth prospect. This is known as retained earnings.


This retained earning that is generally used as companies future expansion plan. You can see the impact on the retained earnings in the stock prices. Logically, each growing companies stock price should also go up. As the retained earning of growing companies also increases and its stock price should also increase as the stock price is a reflection of the retained earnings.


This is the technical logic, but does the market work this way? No, for the market 1+1 is not always 2, it can also be 11 as the market always tries to project future earning. And tries to value the company today, that is related to future earning.


Is the stock market is Zero-sum game?


A zero-sum game means that if I have invested money and someone else has taken out the money. Then the person who has put in the money might have earned it, and the person taken out money might lose the money.


If we talk about delivery-based trade then there’s no logic behind it. Because someone who has put in the money might have put in at a lower rate or an upper rate and want to take out the money now. So it’s not required that this is a Zero-Sum game as if we talk about equity markets the delivery based companies, the profitability of the company which used as retained earning, it grows as it grows along with the country and the economy and the ultimate reflection is on the stock market price. The logic of the zero-sum game is not applicable in the cash market.


Speculative market 


It is the derivative market. It can other options or futures, anyone who buys this contract, has to be sold by someone. If the price increases then the buyer's profit. And if the price decreases then the seller profits and vice versa.





Here clearly there is a contract between the buyers and the sellers of the contract which is deciding the action in the underlying. So it is clear cut no value addition as per the earnings of the company in the derivative market. There are both buyers and sellers in the derivatives market and that is what defines the price, so there is a zero-sum game in derivatives. There is a concept of open interest in the derivative market.


Open Interest


It states that there is a buyer and seller in a position. If there are both parties in the same contract then either the buyer will win or the seller will win.


So the fact that there is open interest, and position in derivatives where there are counter trades. Ultimately it is a zero-sum game.


But there is no zero-sum game in the cash market. Everyone might on as the company is growing along with the earnings and retained earnings. So everyone can own through this process.


Casually using the word zero-sum game is not ok for the market. There are a lot of opportunities available in the market. If you are investing and participating in the business then definitely it is not a zero-sum game, if you are entering the correct business at the correct time.


But if you are treading in derivatives then it is a zero-sum game. You are taking a calculated risk and you know that you might include loss, which is ok, you can take the risk if you want. It is your calculated risk. But a business drives the value in the cash market and under stock price drives the Movement in the derivative.


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