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Old 09-14-2016, 09:03 PM   #43
Enoch Root
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Join Date: May 2012
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Slava:

Just discovered this thread and had a quick read, and I wanted to comment on your early point that the market is a zero sum game and that there is a loser for every winner.

As others have pointed out, that isn't exactly right.

The markets continually go up (over time) because the underlying companies create new wealth for their shareholders. If no one ever traded stocks again, the current shareholders would continue to experience new wealth creation.

What I believe you were getting at, with respect to winners and losers, is a reference to active trading (i.e. alpha). By making active investment decisions, investors deviate from the market return. Some actions will win, and some will lose, and they are a zero sum game. If someone buys a stock, someone sells that stock. So, if it goes up, relative to the market, then the buyer 'won', by experiencing a return greater than the market return, and the seller 'lost', by forgoing that return.

Overall though, the market return is what it is - the total growth of all the companies represented is a calculable number (but there is a return there, not a zero sum game).

It is individual investors, by choosing this particular stock, or shorting that particular stock, that are zero-summing their deviations from the market return. Some win, some lose.

As for dividends, they are no different than capital gains (other than tax consequences). A company takes the investments of its owners (shareholders) and generates a return on that investment. The company can choose to distribute that profit to shareholders (dividends), or retain that capital for further investment, creating capital growth and a higher stock price. Either way, it means a return on investment for the shareholders.
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