How does the stock market increase wealth?

[Opteron]

Just wondering, how do people make money from the stock market? Is it not a zero-sum game so that when one person makes money, another person loses some, minus dividends paid out by the companies? I understand that the net effect of a stock market is to increase a country's productivity through the pooling of capital, but this could occur without a market and simply pooling capital on their own. I'm wondering can the stock market be considered an investment tool for everyone when money is not created in a stock market, but only redistributed and is it not just gambling?

 

[Dickieboy]

It's not that 'another person loses some' but rather someone spends some. Companies profit from revenues (hopefully) which are typically monies received from customers. The increase in production/productivity that is hoped for from stock sales hopefully increases revenue and profits. These increases in revenue/profit is inturn realized by the stockholder either by appreciation of the stock or dividend payments.

And yes it is just gambling but instead of losing the 'whole chip' on a play you have the ability to get out of the investment with some portion of the chip...maybe.

 

[Kushinator]

Just wondering, how do people make money from the stock market? Is it not a zero-sum game so that when one person makes money, another person loses some, minus dividends paid out by the companies? I understand that the net effect of a stock market is to increase a country's productivity through the pooling of capital, but this could occur without a market and simply pooling capital on their own. I'm wondering can the stock market be considered an investment tool for everyone when money is not created in a stock market, but only redistributed and is it not just gambling?

Equity and commodity valuations do not possess the same characteristics as do derivatives, i.e. options and futures. The reason being is that the former tend to increase/decrease with the "flow" of the market, i.e. the net amount of moving into or out of a particular market. Derivatives on the other hand change price (primarily) due to movements in the underlining asset, or the asset the derivative is written in relationship to. Short term interest rates do impact the cost-of-carry, but such information is quickly internalized into markets, and is then reflected in asset prices.

Essentially, stock markets move up and down with the amount of money flowing "into" or "out of" the respective market. For a micro example, think about how an auction works and what happens when you have seller demand eclipsing buyer demand. What happens to the total amount of goods sold at an auction (specifically the average price)?

 

[Kushinator]

In regards to zero-sum, equity and commodity markets cannot be zero sum unless there are equal short positions to long, or (and this is a bit more complicated to explain) if all said investment is indexed instead of individually allocated.

 

[nonpareil]

Just wondering, how do people make money from the stock market? Is it not a zero-sum game so that when one person makes money, another person loses some, minus dividends paid out by the companies? I understand that the net effect of a stock market is to increase a country's productivity through the pooling of capital, but this could occur without a market and simply pooling capital on their own. I'm wondering can the stock market be considered an investment tool for everyone when money is not created in a stock market, but only redistributed and is it not just gambling?

How do they simply "pool capital on their own"? Maybe the stock market was the answer to the question of how best to allocate capital, simple as that.

 

[iliveonramen]

I understand that the net effect of a stock market is to increase a country's productivity through the pooling of capital, but this could occur without a market and simply pooling capital on their own

The problem is going out and finding individuals without the use of markets takes time and can be difficult. What happens if you invested with 2 other people in a company and decided you eventually wanted to sell your share of the company? You would have to go around and find someone to buy out your stake in the company. If it was a large stake you would have to go out and maybe find multiple people to buy portions of your stake. That takes time. Now what happens if you needed to sell your stake because you wanted to go into another business opportunity? You can't until you sell your stake. That is the liquidity that a market provides. If there was a place you could go where other people went that were interested in investing and had money sitting around it would make it easier for you to get out and invest somewhere else.

That is how early markets in the 13th Century came into being. They would just be buildings that investors would hang out in and people that had a good idea but needed money went to. It was also a place you would go if you owned part of a company and wanted to sell those rights to someone else.

It's a win win for both investors. The person that wants to sell a stake of a company and someone that wants to buy a stake in a company.

 

[RabidAlpaca]

Just wondering, how do people make money from the stock market? Is it not a zero-sum game so that when one person makes money, another person loses some, minus dividends paid out by the companies? I understand that the net effect of a stock market is to increase a country's productivity through the pooling of capital, but this could occur without a market and simply pooling capital on their own. I'm wondering can the stock market be considered an investment tool for everyone when money is not created in a stock market, but only redistributed and is it not just gambling?

I'm a day trader by profession. I trade forex, not the stock market, but in forex it essentially is a zero sum game. Any transaction that happens internationally has to go into the forex market. So say for instance, you trade and make a thousand dollars, that money came from the gigantic pool of cash that is the market. Large corporations and governments largely populate this, so when you win, that money may be from countries, companies, or invididual traders.

Say McDonalds for instance has a hedge fund in order to minimize their business risk, this money is just sitting out there for you to scoop up. It's quite sexy really.

 

[oldreliable67]

In regards to zero-sum, equity and commodity markets cannot be zero sum unless there are equal short positions to long, or (and this is a bit more complicated to explain) if all said investment is indexed instead of individually allocated.

Exchange-traded Futures contracts are indeed zero sum. There is a seller for every buyer and a buyer for every seller. That's a simplification of course but it is useful to keep in mind when considering that, each day after a transaction, the clearing corporation associated with the exchange marks the positions of both buyer and seller to market using the previous day's settlement price. The party with a gain is credited with amount; if his account is properly margined, he can withdraw that profit in cash. Conversely, the party with a loss may have to post additional margin.It is often said that the clearing corporation is the counterparty to every trade. Envisioned in this way, it is easy to see that exchange-traded futures contracts are zero-sum transactions.

Note that the zero-sum effects belong to the contracts alone and do not extend the entire position or holdings of hedgers. That is, a hedger may have an asset or a liability whose price fluctuations he is trying to offset or minimize. Thus, his futures position is intended to act as an offset to price changes of the commodity that he owns or is liable for. For example, long wheat (perhaps a farmer), short wheat futures, or long crude oil, short crude futures.

Equities are a different matter entirely.

 

[cmakaioz]

Stock trading doesn't increase real wealth at all. It doesn't actually produce anything.

What stock trading (and other variations of seeking title-income) does do is change title-holders' proportion of claims on real wealth.

Gather two or more title-holders and let them trade until they die of old age, and (through their trading) they will have created...exactly nothing. They will have, however, seen many cycles and ups and downs of claims upon what others produced.

 

[Mach]

Just wondering, how do people make money from the stock market? Is it not a zero-sum game so that when one person makes money, another person loses some, minus dividends paid out by the companies? I understand that the net effect of a stock market is to increase a country's productivity through the pooling of capital, but this could occur without a market and simply pooling capital on their own. I'm wondering can the stock market be considered an investment tool for everyone when money is not created in a stock market, but only redistributed and is it not just gambling?

At least you're asking! Although wiki might be better than us spending time explaning?

The stock market is not simply gambling. The stock market does not simply redistribute a fixed pool of money, its investment. Conceptually it's similar to if you personally opened a hot dog stand. You invest time, money, skill, into the market, and you get some return on your investment (people buy your yummy dogs!). Now, apply your same thinking to that, rather than the big ole evil stock market. Did the hot dog guy just redistribute stuff? Is he just gambling? If no, then largely that carries over the to stock market (and all the other mini-investment markets all over the world!)

When it's said that time is money, remember to use it in the reverse, money is time. Investors are investing time and hopefully producing results. What people seem to not get sometimes is that they harp about investors "doing nothing to earn something". That violates what we already established, that time, and skill, and experience, etc., is routinely, regularly, every day of every year, given a monetary value on the market. They literally invest time/skill/energy. It makes no sense to say "it's not their own time/energy!" When you drive to work, it's not your time and energy that gets you there. Imagine if you had to build your car by hand before you could commute.

In any case, stock markets are a reflection of the natural pooling of money. Stocks on a public exchange are often the last step in the size of the pool though, most people start pooling their own wealth/time, maybe then adding friends/family to that pool, maybe then getting an angel investor or two, and then maybe some venture capital, and lastly, may be so fortunate to be worth taking it to the public via the stockmarket as a publicly traded company.

Stock markets create a relatively efficient way to link investment money (time/effort/skill) with a business that presumably is working to meet market demands. It could be one person, or a huge multi-national, not a lot of difference other than scale, in terms of what they are doing.

 

[Kushinator]

Exchange-traded Futures contracts are indeed zero sum. There is a seller for every buyer and a buyer for every seller. That's a simplification of course but it is useful to keep in mind when considering that, each day after a transaction, the clearing corporation associated with the exchange marks the positions of both buyer and seller to market using the previous day's settlement price. The party with a gain is credited with amount; if his account is properly margined, he can withdraw that profit in cash. Conversely, the party with a loss may have to post additional margin.It is often said that the clearing corporation is the counterparty to every trade. Envisioned in this way, it is easy to see that exchange-traded futures contracts are zero-sum transactions.

Note that the zero-sum effects belong to the contracts alone and do not extend the entire position or holdings of hedgers. That is, a hedger may have an asset or a liability whose price fluctuations he is trying to offset or minimize. Thus, his futures position is intended to act as an offset to price changes of the commodity that he owns or is liable for. For example, long wheat (perhaps a farmer), short wheat futures, or long crude oil, short crude futures.

Equities are a different matter entirely.

If the post that targeted your response gave the impression that i am in disagreement with anything you stated, then i do apologize.

 

[imagep]

It's funny that on another thread last week almost no one was willing to admit that any small portion of our economy was zero sum, yet there are several people suggesting that their are some zero sum economic areas on this forum.

 

[cmakaioz]

The stock market is not simply gambling. The stock market does not simply redistribute a fixed pool of money, its investment.

The pool is not fixed, but it remains the case that trading stocks doesn't produce anything. Ever.

Conceptually it's similar to if you personally opened a hot dog stand.

No, because a hot dog stand involves at least some level of production process (i.e. assembling and heating hot dogs, serving up condiments).

You invest time, money, skill, into the market, and you get some return on your investment (people buy your yummy dogs!). Now, apply your same thinking to that, rather than the big ole evil stock market. Did the hot dog guy just redistribute stuff? Is he just gambling? If no, then largely that carries over the to stock market (and all the other mini-investment markets all over the world!)

Nonsense. No matter how skillfully or ineptly one trades stocks, and in matter the frequency or the amount of funds passing through the trades, no amount of stock trading produces real wealth. The perceived level of skill of a stock trader has a big impact on whether or not they are hired/employed, what clients are willing to allow brokers to manage, etc., but whether a stock trader is viewed with absolute trust or with deep suspicion is also irrelevant. Stock trading in and of itself doesn't produce anything at all.

When it's said that time is money, remember to use it in the reverse, money is time. Investors are investing time and hopefully producing results. What people seem to not get sometimes is that they harp about investors "doing nothing to earn something". That violates what we already established, that time, and skill, and experience, etc., is routinely, regularly, every day of every year, given a monetary value on the market.

Assigning monetary value to something is an entirely separate issue of whether or not the object or activity in question actually produces anything. Married couples often value their wedding rings...that doesn't mean their wedding rings actually produce anything. Something being capable of fetching a price is not the same as that thing actually producing wealth.

They literally invest time/skill/energy. It makes no sense to say "it's not their own time/energy!" When you drive to work, it's not your time and energy that gets you there. Imagine if you had to build your car by hand before you could commute.

People invest time, skill, and energy into playing Warcraft all day. Does that produce real wealth? No.

In any case, stock markets are a reflection of the natural pooling of money. Stocks on a public exchange are often the last step in the size of the pool though, most people start pooling their own wealth/time, maybe then adding friends/family to that pool, maybe then getting an angel investor or two, and then maybe some venture capital, and lastly, may be so fortunate to be worth taking it to the public via the stockmarket as a publicly traded company.

Stock markets create a relatively efficient way to link investment money (time/effort/skill) with a business that presumably is working to meet market demands. It could be one person, or a huge multi-national, not a lot of difference other than scale, in terms of what they are doing.

Financial investments in their own right don't produce anything. Exchanging shares of title to some real or intellectual property doesn't produce anything. It changes which entities are recognized as being entitled to unearned title-income, but it doesn't actually produce any wealth at all. Levels of investment may have a big impact on who decides to participate in production and under what terms, but it doesn't itself produce anything.

There's a simple experiment which demonstrates this. Take X number of people and stick them in a room with chips or cash. Close the door and tell them to keep playing some kind of gambling game. No matter who finally wins that game, and no matter how many hands or rounds it takes to achieve victory, and no matter how blindly or skillfully the winner wins...at the end of the game, the aggregate money in the room will be the same, and the participants (ignoring bodily fluids, farts, and burping) will not have produced anything at all.

Stock trading can be done poorly or skillfully, can lead to financial gains or losses for specific actors, but it never actually produces any kind of real wealth.

 

[oldreliable67]

!Re: How does the stock market increase wealth?

If the post that targeted your response gave the impression that i am in disagreement with anything you stated, then i do apologize.

No, not at all! To the contrary, my post was merely to reinforce and illustrate the zero-sum aspects of commodity futures and differentiate them from equity trading.

 

[oldreliable67]

Re: !Re: How does the stock market increase wealth?

Stock trading in and of itself doesn't produce anything at all.

That's a bit too broad. While it is true that stock trading per se does not produce a tangible product, one that can be consumed or held in one's hand, there are other aspects of any marketplace that differentiate themselves from such products.

First a clarification: The tone of your remarks suggest that by "stock trading," you refer to day traders and others who take speculative positions in stocks, hoping to earn short-term profits from subsequent moves in their prices. The determining characteristics then seems to be "short-term" and "speculative" as opposed to "long-term," which is more typically associated with "investment" rather than "speculation." Does that sound about right?

Stock trading, as I infer your comment to mean, does one very important thing: it adds to the depth, breadth and liquidity of the overall market. These are non-trivial aspects of any marketplace, not just stocks. In economic terms, they have been referred to as "the holy trinity." When the time comes for a pension fund to invest the proceeds of this year's allocation from its members, for a corporation to float its initial public offering (or an existing corporation to issue new shares), or for a corporation to buy back some of its shares, this depth, breadth and liquidity are the characteristics that permit these actions to take place without severely disrupting the markets.

Who are "stock traders?" There are two general classes: exchange-designated market makers, and non-exchange designated market makers. Exchange-designated market makers are those whose license or membership requirements mandate that they provide continuous bids and offers for the securities for which they are the designated market makers. Market making schemes vary from exchange to exchange, but the one underlying characteristic is that they risk their own capital (or that of their employer) while fulfilling their function. Also in the exchange-affiliated group are exchange members who trade strictly for their own account and those who execute orders for others.

The other general class consists of non-exchange affiliated traders. These sound more like the type of trader to which you refer. They tend to take short-term positions, sometimes for fractions of an hour, seeking short-term profits, risking their own capital while doing so. Clearly, their activities add to market liquidity.

Regardless of exchange-affiliated or not, these activities add to the depth, breadth and liquidity of the markets, thus performing an economic service. True, this activity doesn't result in something physical that can be held, manipulated or consumed, but it is economically valuable nonetheless.

Note: I don't mean to insult anyone's knowledge level with these basics. You (and some others) may be well aware of all that I've written, but I have no way of knowing who does and who doesn't, so I proceeded from the assumption that basics would be illustrative to most.

 

[cmakaioz]

Re: !Re: How does the stock market increase wealth?

That's a bit too broad. While it is true that stock trading per se does not produce a tangible product, one that can be consumed or held in one's hand, there are other aspects of any marketplace that differentiate themselves from such products.

The question was about real wealth. The part of your response I've italicized acknowledges that stock trading doesn't produce real wealth. End of story. Gaining knowledge and skill in predicting business outcomes may help someone develop some form of real wealth, but the trading in and of itself doesn't contribute anything at all to production. That doesn't make trading good or evil...it's just not production, that's all.

First a clarification: The tone of your remarks suggest that by "stock trading," you refer to day traders and others who take speculative positions in stocks, hoping to earn short-term profits from subsequent moves in their prices. The determining characteristics then seems to be "short-term" and "speculative" as opposed to "long-term," which is more typically associated with "investment" rather than "speculation." Does that sound about right?

No, actually. The motive and scope of trading in title or financial investments doesn't matter...in all cases it's still not production. No amount of trading in title produces anything. Ever.

Trades can and do frequently influence who agrees to participate in production or service, and under what terms, but the trading doesn't actually contribute to production itself.

Stock trading, as I infer your comment to mean, does one very important thing: it adds to the depth, breadth and liquidity of the overall market. These are non-trivial aspects of any marketplace, not just stocks. In economic terms, they have been referred to as "the holy trinity." When the time comes for a pension fund to invest the proceeds of this year's allocation from its members, for a corporation to float its initial public offering (or an existing corporation to issue new shares), or for a corporation to buy back some of its shares, this depth, breadth and liquidity are the characteristics that permit these actions to take place without severely disrupting the markets.

Who are "stock traders?" There are two general classes: exchange-designated market makers, and non-exchange designated market makers. Exchange-designated market makers are those whose license or membership requirements mandate that they provide continuous bids and offers for the securities for which they are the designated market makers. Market making schemes vary from exchange to exchange, but the one underlying characteristic is that they risk their own capital (or that of their employer) while fulfilling their function. Also in the exchange-affiliated group are exchange members who trade strictly for their own account and those who execute orders for others.

I appreciate the details, but they're ultimately irrelevant. FINANCIAL capital is not a factor of production. It has heavy influence in many cases (as above) over who agrees to contribute real work to production, but it is not itself a productive force. The productive capacity of W materials manipulated by X workers with Y payroll over the course of Z time...is exactly the same as W+X+Z with NO Y at all. The likelihood of consent and enthusiasm may change, but not the productive capacity.

The other general class consists of non-exchange affiliated traders. These sound more like the type of trader to which you refer. They tend to take short-term positions, sometimes for fractions of an hour, seeking short-term profits, risking their own capital while doing so. Clearly, their activities add to market liquidity.

While relevant to likelihood of participation, liquidity is irrelevant to productive potential. People don't have to hold title to something in order to use it. The entirety of financial systems and their operation has no bearing on productive capacity. Real productive capacity is determined by physics, engineering, and logistics, not title (or the speed at which title is transferred).

Regardless of exchange-affiliated or not, these activities add to the depth, breadth and liquidity of the markets, thus performing an economic service. True, this activity doesn't result in something physical that can be held, manipulated or consumed, but it is economically valuable nonetheless.

As per above...finance influences agreement to produce, but does not influence actual production directly.

 

[oldreliable67]

Re: !Re: How does the stock market increase wealth?

Cmakaioz,

You indulged in quite a long post in which you seemed to want to refute or somehow disagree with my point that first, agreed with your prior post that stock trading produced no products of a tangible nature, then seemed to want to deny that stock trading contributed something of a non-tangible nature, but you didn't.

Bottom line: With respect to physical, tangible products, I did not disagree with your position. With respect to your assertion that "finance influences agreement to produce:" that is essentially agreeing with my point that a sufficiently deep, broad and liquid market facilitates allocation of capital to enterprises that do produce tangible products.

Consequently, despite your long post, in a form and tone that suggests disagreement, you didn't, as far as I can tell.

 

[cmakaioz]

Re: !Re: How does the stock market increase wealth?

Cmakaioz,

Consequently, despite your long post, in a form and tone that suggests disagreement, you didn't, as far as I can tell.

My impression -- and of course I could be wrong about this -- is that your position appears to imply that the specific form of finance in a given system actually contributes to production...that it actually has some kind of unique contribution to real production. Given that financial "industries" address conventions of exchanging title over products and services, as well as the return on products and services partially employing real capital, it looked to me like you were headed in the direction of equating specific systems of motivation and agreement for production (increased depth, liquidity, etc. of a market) with production itself. I've seen that tack taken by many with claims like "...Well, if X (owners) didn't invest in a factory, then there would be no factory." Such a claim is of course false, since motivations and systems of title may change the involvement of certain individuals and groups, but the absolute capacity for production is determined by physics, engineering, logistics, and knowledge of specific production processes. (Further, market-access to needs and wants through purchase is itself not necessary for production).

If I got trigger-happy and anticipated a frame or a position you weren't actually advancing, my apologies...I've seen discussions take take turn so frequently on this type of subject that I sometimes prepare a counterargument to an argument which hasn't actually show up yet (or at least not from you).

 

[Opteron]

Re: !Re: How does the stock market increase wealth?

Ok, so I think people are saying the stock market doesn't produce anything, that hedgefunds don't really add to production other than a small effect of allowing capital to flow easier, and I agree, although the stock market is the most efficient way to allocate capital. I just want to confirm that not everybody can make money in the stock market, right? I think I heard some saying that if you privatized social security you could invest your own money in the stock market and make like a 15% return. But I just want to confirm that if everybody invested in the stock market, that not everybody could expect a 15% return on their money in the market, because if someone gains 15%, someone else must lose 15%, correct, of course minus dividends paid out by the company? In the long run everyone can't make money right, even with equities, because money is not produced in the market, correct?

 

[RabidAlpaca]

Re: !Re: How does the stock market increase wealth?

Ok, so I think people are saying the stock market doesn't produce anything, that hedgefunds don't really add to production other than a small effect of allowing capital to flow easier, and I agree, although the stock market is the most efficient way to allocate capital. I just want to confirm that not everybody can make money in the stock market, right? I think I heard some saying that if you privatized social security you could invest your own money in the stock market and make like a 15% return. But I just want to confirm that if everybody invested in the stock market, that not everybody could expect a 15% return on their money in the market, because if someone gains 15%, someone else must lose 15%, correct, of course minus dividends paid out by the company? In the long run everyone can't make money right, even with equities, because money is not produced in the market, correct?

Good question. I used to trade stocks before I switched for forex. I have to say, 15% is ridiculously ambitious for the average guy, especially in the current state of the world economy. 5% would be a lot more reasonable, and all of that is contingent on how the market does. I got tired of having such widely varying years, making big one year, losing it all the next. I think buy and hold is dead.

 

[cmakaioz]

Re: !Re: How does the stock market increase wealth?

...But I just want to confirm that if everybody invested in the stock market, that not everybody could expect a 15% return on their money in the market, because if someone gains 15%, someone else must lose 15%, correct, of course minus dividends paid out by the company?

While it's not a personal, individual case of Mary gains X%, so Richard must necessarily lose X%, on the aggregate scale that's not too far from the truth. But your next sentence is even more to the point:

In the long run everyone can't make money right, even with equities, because money is not produced in the market, correct?

Regardless of who gains or loses, and in what amount, no amount of these title-trades will ever produce anything. Even if we take the special case of gaining potential insights into future market activity by recognizing patterns in the values of particular commodities (commodities in the general sense of things assigned a value and traded, not just the financial sense of commodities), this too is NOT produced by trading, but by study and analysis, and such study requires work, instead of falling from the sky if some magical threshold of activity is reached. There's no requirement that someone who's actually conducting these trades must actually be the one doing the studying, indeed the data resulting from imagining or implementing such an approach would be worse than worthless (if one wanted to look at patterns exclusively from the data of one specific trader, the de facto object of study becomes THAT trader's patterns, not the patterns of the larger market. It would boil down to having a sample size of 1 (arguably the second-most distortion-prone choice of sample, with a sample size of ZERO -- no evidence at all -- being the worst).

 

[imagep]

Re: !Re: How does the stock market increase wealth?

Ok, so I think people are saying the stock market doesn't produce anything, that hedgefunds don't really add to production other than a small effect of allowing capital to flow easier, and I agree, although the stock market is the most efficient way to allocate capital. I just want to confirm that not everybody can make money in the stock market, right? I think I heard some saying that if you privatized social security you could invest your own money in the stock market and make like a 15% return. But I just want to confirm that if everybody invested in the stock market, that not everybody could expect a 15% return on their money in the market, because if someone gains 15%, someone else must lose 15%, correct, of course minus dividends paid out by the company? In the long run everyone can't make money right, even with equities, because money is not produced in the market, correct?

There are no guarantees in the stock market. A few lucky people make huge profits, a few smart people also make huge profits. Most people are not financial guru's and most people can't really afford to loose very much. for most people, unless they are willing to purchase index funds and hold them til retirement, "playing" the stock market might not be their best investment.

In theory, everyone can make money in the stock market, as more and more money comes into the market over an extended period of time. The general cause of inflation is "too much money chasing too few goods". As more money enters our stock market, we end up with "too much money" chasing too few stocks, and thus the stock market inflates, just like real estate, or anything else that has a fairly fixed supply. Also, in the long term most companies tend to be profitable and either retain these profits making their company more valuable, or issue dividends. So in the long term, as long as one has a highly diversified portfolio and doesn't try to time the system or run out and buy up all of whatever stock seems to be hot at the time (like the pending facebook sale), most stock investers will do fairly well.

About 12 years ago there were a number of reports that found that as of that time there had never been a 30 year period where the market didn't average 10% per year returns. But I wouldn't expect to yeild 10% returns automatically. First, there were some other studies where they used different fixed time periods (like 10, 15, 20, and 25 years) and found much lower yeilds - seems that 30 years just happened to be a fluke. And the 30 year 10% thing did not continue to hold true for the next 12 years. Investment returns tend to be much lower today than they used to be.

The average middle class person with passive investments should probably work on an assumption that he may over a long period of time yield something like 2% over inflation, and even that can be difficult these days.

 

[Ahlevah]

I'm wondering can the stock market be considered an investment tool for everyone when money is not created in a stock market, but only redistributed and is it not just gambling?

I suppose that depends on your point of view. If you put money in a one-year CD at your local bank and collect 0.25% interest when it matures, you're gambling that those dollars might be worth something at some future date even while you're losing money now. If you buy a life insurance policy against your own life, you're gambling you'll be dead before the term of the policy expires. It's a bet you probably hope you'll lose, because only a creditor or an heir can collect on it. Likewise, when you buy shares in a publicly-traded company, while you're buying a stake in the future profits of that company, you're also making a bet. You're betting that the market's assessment of the present value of expected future profits is less than actual future profits. This is why people will pay $500-plus for a share in Apple but only $0.35 for Eastman Kodak stock. Personally, I'd rather "gamble" by buying an income stream in a high-quality company with a history of growing earnings and raising its dividend than put it in a bank where I can collect squat for it. In the long run, my chances of making money with a stock like that are pretty good, unlike the bank CD in which I'm almost guaranteed to lose money due to inflation.

 

[Mach]

Opteron,

I like your summary, and your clarification of your actual question: As to "can in theory everyone in the market make money"?

Based on historic growth of the stock market to present, the answer is yes. Our economy has grown on average, not sure why everyone could not have participated in it. Why would you think not everyone could participate in that? But people being human, timing, etc., will always result in winners/losers. See the post above this, he's willing to "gamble" on individual stocks.

 

[oldreliable67]

Responding to Opteron, Mach wrote:

Based on historic growth of the stock market to present, the answer is yes. Our economy has grown on average, not sure why everyone could not have participated in it. Why would you think not everyone could participate in that? But people being human, timing, etc., will always result in winners/losers. See the post above this, he's willing to "gamble" on individual stocks.

The 'larger pie' is a popular analogy used to illustrate how the stock market can indeed increase wealth over a sufficiently long period of time. It is a fundamental economic perception that growing populations dictate a growing economy. Not in a straight line, but on average and over time, a growing population will both demand more in goods and services and find ways to furnish those goods and services. Thus, a randomly selected portfolio of equities should, over a sufficiently long time frame, at least mirror the growth of the economy.

Think of an apple pie, or maybe a small pizza. With eight slices. With one 'owner' of each slice. Over time, that pie somehow magically grows, say, from an 8" pie to a 10" pie, then a 12 incher, then a 14 incher. Ownership of the slices doesn't change. Over time, each owner owns the same proportion of the pie, but the overall size of the pie has continued to grow, resulting in each owner now laying claim to a much larger slice than previously. A simplistic example, I know, but it is illustrative.

Think of what makes an economy grow over the long-term, at it's absolute most fundamental level. It is population growth. The inexorable demands of a growing population, if facilitated by an economy relatively free from interference, will, through the efforts of entrepreneurs, expand to try and meet the demands of the populace. This is as deliberately simplistic as I can make it; I know some will throw brickbats at it, but so be it!

As Mach alluded to, the key to increased wealth from the stock market is an economy that grows over time, thereby increasing the stock of wealth. Growing the pie.