I don’t have a complete picture of my own of how everything works and fits together, but this part seems clearly wrong:
If you buy the stock from an investor, then you’re simply gaining money which that investor would otherwise have gained. It’s zero sum: their missed opportunity is exactly equal to your gain.
A typical case of a stock being undervalued is when there is some large shareholder trying to exit for liquidity reasons (think of a venture capitalist selling shares in an IPO’ed company so they can redeploy the capital into new startups, or a company founder selling stock to reap the rewards of their labor) and not enough people with enough capital have done enough work to be confident of the company’s true value. If you step in as an additional buyer, you raise the price they can sell at, so for example the VC now has more capital to redeploy into their next round of investments. In general it seems that if you do additional work to bring stock prices closer to fair value, society as a whole would be rewarding people in a more efficient way, with the rewards being closer to the actual value they created, which should be positive-sum.
It is still tempting to assume each exact transaction is zero sum (while the macro level invisible hand is yielding positive sum) but that would be a mistake. First, there may be a little bit of buyer and seller surplus (represented by a market maker facilitating a strike price between the bid/ask spread). Second, risk matters—could be that gain the seller missed out on was just not the right deployment of their capital for their risk profile, so they actually aren’t “missing out” on it at all. Third, you’re not observing opportunity costs in strike prices, so could be that gain the seller missed out on was a lower conviction bet they wanted to take off so they could get into a higher conviction bet, so they aren’t actually “missing out” on it at all. Fourth, add in a subjective value function and suddenly on a utility basis, it is extremely easy to see the potential for actors to view trading as offering gains (though as mentioned, you don’t even need this to begin chipping away at the zero sum notion).
Finance is easy to side-eye, but read Matt Levine, it’s just like any other market where people are trying to solve each other’s problems and make some margin.
I don’t have a complete picture of my own of how everything works and fits together, but this part seems clearly wrong:
A typical case of a stock being undervalued is when there is some large shareholder trying to exit for liquidity reasons (think of a venture capitalist selling shares in an IPO’ed company so they can redeploy the capital into new startups, or a company founder selling stock to reap the rewards of their labor) and not enough people with enough capital have done enough work to be confident of the company’s true value. If you step in as an additional buyer, you raise the price they can sell at, so for example the VC now has more capital to redeploy into their next round of investments. In general it seems that if you do additional work to bring stock prices closer to fair value, society as a whole would be rewarding people in a more efficient way, with the rewards being closer to the actual value they created, which should be positive-sum.
It is still tempting to assume each exact transaction is zero sum (while the macro level invisible hand is yielding positive sum) but that would be a mistake. First, there may be a little bit of buyer and seller surplus (represented by a market maker facilitating a strike price between the bid/ask spread). Second, risk matters—could be that gain the seller missed out on was just not the right deployment of their capital for their risk profile, so they actually aren’t “missing out” on it at all. Third, you’re not observing opportunity costs in strike prices, so could be that gain the seller missed out on was a lower conviction bet they wanted to take off so they could get into a higher conviction bet, so they aren’t actually “missing out” on it at all. Fourth, add in a subjective value function and suddenly on a utility basis, it is extremely easy to see the potential for actors to view trading as offering gains (though as mentioned, you don’t even need this to begin chipping away at the zero sum notion).
Finance is easy to side-eye, but read Matt Levine, it’s just like any other market where people are trying to solve each other’s problems and make some margin.