Tuesday, October 26, 2010

I view stock as something that has its own intrinsic value, and is therefore worth something, just like any other investment- a house or a piece of land. However, just like houses or land, the value of stock can go up or down. Do we consider the buying and selling of a house to be a zero sum game? The amount a person loses or gains can be measured in money but I think it can also be measured in the value a house holds. For example it may cost 40,000 to build a house, and a buyer may purchase it for 50,000. The seller has obviously made a profit, and the buyer has lost money in general, as he bought a house for more than it cost to build it. However, the buyer has the purchasing power to buy not just a house, but also a place to live, eat, sleep, spend time with his/her family. Therefore, the buyer is buying more than just a house, this “more than just a house” has meaning specific to each individual, eg- security or social status.

Just the same way, when someone buys stock, it is an investment, and when one buys stock he/she hopes to make a profit off it, just like the person who built the house. When buyer 2 buys this stock from the seller wealth is created, as the buyer 2 values this stock to be higher than what is was purchased for, just like the case of the person who bought the house for a higher price than what it was made at. I think that in the transactions that follow wealth is created, as the worth of the stock increases. Wealth is not a zero sum game, I think, therefore stocks are not a zero sum game either!


1 comment:

  1. The exchange of commodities, whether durable goods, capital, or consumption goods have different values to different people. The redistribution of goods from the hands of the people that have lower value into the hands of those with higher value increases the efficiency of the market/world. That is how wealth is increased by trade. There is both a transfer of wealth and a creation of wealth in this case. A financial instrument only has value in that it is a store of wealth. No wealth is created by its trade.