Where does the money come from? - Page 2
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Thread: Where does the money come from?

  1. #11
    That is the concept of zero sum needs to be examined through the concept of complete liquidation. While it is definitely true your guide counterparty may reap the benefits of purchasing your profitable position, the net result of all the positions from the market has to balance to zero (technically it#8217;s negative once you account for transaction costs, but let#8217;s keep it simple).

    The error in logic that is occurring on your concept is the assuming the Foreign Exchange market is a part of the money supply. It actually operates independently of what happens with regard to the growth and contraction in the whole quantity of currency units in presence (not unlike a stock in connection with the company it is intended to signify ). A Foreign Exchange contract is not a monetary unit; it is a commnt to transact monetary units.

    Let us examine 1 contract between two parties. Irrespective of the requirement for either party agrees to offer a number of units 3 times from now to the other party. Once the contract (transaction ) is executed the agreed upon rate between the 2 parties will not change. On the other hand, the value (as determined by other participants in the market) will vary between the time the contract has been executed and the time it is eventually delivered. Some actual numbers will produce more sense I imagine#8230;

    Party 1 offers celebration two 100,000 USD for $200,000 CAD. As soon as they have made this agreement, the exchange rate is fixed between them. If the market rate has shifted that USD is worth $300,000 CAD, celebration 2 can market the agreement to someone else and pocket the $100,000 CAD. Party 1 may also liquidate the contract, however he would need to take a loss of $100,000 CAD. The simple fact that someone else can assume that contract is irrelevant and here#8217;s why:

    Lest say celebration 3 and celebration 4 buy the agreements from party 1 and party 2 respectively. What would happen if the market rate transferred back to its initial value of $100,000 USD CAD? Party 3 could gain $100,000 Party 4 and CAD would lose it. The value of both the gains and losses is zero, as you can see, and Foreign Exchange is thus a zero sum game.

    It gets confusing because the markets are so big. More often than not, parties 1,2,3, and 4 are not dealing with the same single contract. A Foreign Exchange contract is standardized, so they are interchangeable with any other and thus this simple example would probably mushroom out to 6 parties trading 5 distinct contracts from the actual world. Even though all 6 of these parties manages to make a profit in their dealings by liquidating at different times, somewhere down the line someone (or an aggregate of someones) will shed the precise quantity of profit these parties gained. In Foreign Exchange the part that is someTIME is 3 times into the future. 3 times after all these trades happen, each contract will need to be settled; which is why most people can grasp how Foreign Exchange is zero sum while the stock market supposedly is not.

    I said the stock market is zero sum on a long enough timeline because it adheres to the same mechanics, but with no settlement date. The winners are rolled forward in time. If all the positions in both markets were liquidated at precisely the same time the losses would accrue to the winners. And so they're zero sum.

    NOTE: I don#8217;t know if my celebration 1, 2, etc profit accrual instructions are correct. It takes components for me to figure out in my head. Just know that the concept is correct even if the correct winners aren#8217;t

  2. #12
    After extensive deliberation about the subject I have decided that I made two mistakes. The stock market and the bond market are not zero amount. Stocks that pay dividends are amount as much as the amount that has been paid out to investors. That says nothing about the inherent value of a stock ofcourse since the companies are under no obligation to cover it.

    Bonds are not zero amount either. The futures market where bond prices are decided is zero amount for the very same reasons the Foreign Exchange market is. After the underlying security is paid for, the revenue stream is a positive sum accrual to the purchaser. Whereas the calculations will differ from bond bonds have an intrinsic value. It should be said that the intrinsic value is decided by the time of issuance, not in the open market.

    The capital gains portion of this argument remains valid since the quoted price of the securities can only change throughout the supply/demand variables introduced by market participants.

    That likely wasn't the clearest explanation, so that I welcome any comments or queries...

  3. #13
    r
    Guest
    Quote Originally Posted by ;
    After extensive deliberation about the subject I've determined that I made two errors. The stock market and the bond market are not zero amount. Stocks that pay dividends are amount as much as the amount that has been paid out to shareholders. This says nothing about the inherent value of a stock ofcourse because the companies are under no duty.

    Bonds aren't zero amount either. The futures market where bond prices are determined is zero amount for the very same reasons the FX market is. Once the security is paid for, the prospective revenue stream collected in interest is a good sum accrual to the buyer. Whereas the calculations will differ from bond to bond, bonds have an intrinsic value. It must be said that the value is determined by the time of issuance, not in the market.

    The capital gains portion of this debate is still valid because the quoted price of these securities can only change through the supply/demand factors introduced by market participants.

    That probably was not the clearest explanation, so I welcome any comments or questions...
    you're correct. To add, bond and stock holders have the power over the businesses. They could vote supervisors out and bondholder can get the court to order the company.

    However a large number of investors are enjoying the stocks and bonds for the capital gains. That is the part that is an sum game.

  4. #14
    It's soo confusing that make me want to ask a very simple question...

    if I buy a hamburger for $9 and eat it, I am on the other hand? Seeing that manner, ridding isn't so bad.... That $9 remains exist also,
    but if seen by my side just, today I have 9 less, with no trace

  5. #15
    Quote Originally Posted by ;
    it is soo confusing that make me want to ask a very simple question...

    if I buy a hamburger for $9 and consume it, I am on the loosing side? Seeing that manner, ridding is not so bad.... That $9 is still exist also,
    but if noticed by my side just, today I have $9 less, without trace
    Yes, but did you order your burger with extra cheese?

  6. #16
    Quote Originally Posted by ;
    I missed this first time . It thats and would not precisley it IS zero sum. The value of a stock has nothing to do with the worthiness of the company it is supposed to represent. The stock price is determined by the market capitalization devided by the number of outstanding stocks. A market capitalization is the value of all the investor funds which are invested in that stock at that moment in time. As funds move into and from the inventory, the market capitalization changes along with the aggregate value of each share will grow or fall. A stocks market capitalization is akin to the jar of water in my previous example.
    We are getting into why folks perceive stocks as having value now. The inventory will not have to do with the company's worthiness, it is just you came up with that it doesn't. Stocks represent ownership of an organization and its actual assets, and which explains why there is an advantage that will nevertheless have a value from the scenario you invented.

    As for capital impacting the market cap, that is not how it works. Market cap is not affected by individual buying and selling of stocks. If the stocks are perceived as having a greater value it's impacted and people are willing to pay more. An individual sale of inventory doesn't remove money from the market cap because someone else just put the identical amount of money in.

    Quote Originally Posted by ;
    This being the case, you can just earn money by holding a stock while more money is flowing into the stock(or shorting it as money flows out). You eliminated from the jar If you pull it from the aggregate value of each share drops.
    But when you sell a stock, someone buys it. Somebody else puts back in the money you take out.

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