Is trading in financial markets a zero-sum game?

Many people see trading in financial markets as a zero-sum game, as when one individual sells and another buys a product, the cash transfer is only one direction which is from the buyer to the seller. From the cash holding side, at that particular time point when the trade is just made, it is a zero-sum game, as the amount of cash that the seller gains and the seller loses is the same and the total amount of cash holding for the two individuals does not change before and after the trading takes place. However, if we believe asset values change over time, this is commonly believed by most of us, the total asset value of the two individuals can change over time. As the total value of the assets held by the two individuals can change before and after the trading takes place, it is then not a zero-sum game. However, to change the value of the product, (let’s say the product is a share), both individuals do not have influences on the actual value of the product, although they can place different prices in the market as they are the only players in the market.; the actual value of the share depends on the returns from the company that if the company gives greater dividends, then the value increases, and vice versa. Then what is the dividend yield dependent of? It depends on the revenue and profit it can get from the economy. Then back to the cash holding for the two individuals, especially the buyer, as the company gives out dividends to its shareholders, its shareholders, it means the total cash holding for the two individuals increases when the company gives out dividends. Of course, some companies do not give out dividends, they have other methods to inject more cash into the financial markets. For example, they have buy back schemes that they purchase their companies’ own shares from their shareholders, this is one method to directly supply cash for the financial markets from the real economies. Moreover, expectation is another source of cash supply in financial markets, investors have expectations about their target companies, the expectations are about how much cash their target companies will give out to their shareholders. Investors change their expectations over time when their expectations become more optimistic, they supply more cash in the financial markets and vice versa. Let us assume there is a financial market that no company gives out dividends or has other types of cash giving out schemes, then the total amount of cash is dependent solely on investors’ expectations. When the expectations stay the same over time, it means no more cash will be injected into the market, then trading becomes a zero-sum game, as the total amount of cash held by the investors is the same over time and before and after trading happens. However, when the investors’ expectations become more optimistic, more cash will be injected into the financial market, then it is no longer a zero-sum game and the total amount of cash will increase; if the expectations become more pessimistic, more cash will be pulled out of the market, it is not a zero-sum game either and the total amount of cash will decrease. Of course, if the total amount of cash is fixed in the economy, the trading is more like a zero-sum game, as the amount of cash cannot increase forever. However, in an economy with a fixed amount of cash, it is more likely to have a deflation, which means the real value of a fixed nominal value increases over time, then it is not a zero-sum game either in terms of real value of the cash in the financial market as well as the economy.

Overall, the return from the financial market depends on the values created by the real economy and people’s expectations and discount rates. If a financial market is experiencing a trend is very different from its economic growth trend, then there must be something wrong in the financial market. In addition, the decision of trading should be made based on a comparison between its current price and expectations of overall discounted cash return, investors are not actually competing with each other.