Trading is a Minus Sum Game

Submitted by Marco Palmero on 14 February, 2008 - 09:37

The house always wins

In the stockmarket, for every trade that is buyer and a seller. In a theoretical, highly efficient market: if the seller puts in $50 into the market – the buyer would also take out $50. But we've been told a lie. Trading is a minus sum game. In reality, the seller would be really selling $45 worth and the buyer, gets $45 worth of stock. So where does the $10 ($5 + $5 on both sides) go?

If the traders win or lose, the house would have made their cut and they win in the long term.

If trading is a minus sum game, then what is a zero sum game? A zero sum game is when every gain or loss by each participant of the game is exactly balanced. In other words: if we add up all the winners and losers we should get zero. Hence, winners receive as much money as losers paid out.

Have you heard the saying, "The house always wins"? Well the phrase is usually used in terms of casinos and gambling; but the same applies in the financial markets. Every trade placed into the sharemarket is subject to fees and charges: namely commissions like brokerage fees and service charges like interest rates. If the traders win or lose, the house would have made their cut and they win in the long term. So, in the trading game, the trader also needs to contend with the 'leakage' in the money markets as well as outsmarting their fellow traders. Therefore, the odds of succeeding at trading the markets are certainly stacked up against the trader.

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