Are the Secondary equity markets completely a zero sum game?

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So does any of the money that is generated from the surplus price above the face value of the stock be used for any of the company’s operational activities?

Apart from the advantage of providing liquidity to the primary market, what other advantages do the secondary markets give to the company?

Does it mean that even if the stock price on the secondary market is skyrocketing/plummeting, the operational activities of the company are not affected?

In the long run however is there a way that a company could benefit from the rise in stock price without raising additional equity from the markets?

@siva @nithin

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@Karthik guess you are best to answer this :slight_smile:

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Thanks @Aditya_Bhat for asking this. I also had this question in my mind for a long time

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It is not zerosum game. It has price slips. For details read Alaxender elders trading for a living

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Price slips are a small part of the picture, but what i mean by a zero sum game is that there is a exchange of money between parties but no real value is created out of cash market trading…

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To understand this, you need to understand why a company files for an IPO and why the shares really lists on the secondary markets.

When a company files for an IPO, the company has to clearly state the purpose for raising this capital from the public. This goes on record and SEBI takes a note of this. Any deviation from the stated purposes is taken quite seriously by SEBI and the company is held responsible. The stated purpose can be anything - operational expansion, repay debt (taken at higher cost of funds), or even provide an exit to promoter/early investors…or it could be a mix of all these purposes.

So if the company’s intent is to raise 100 Cr by issuing two million shares (works out to 500 per share), then upon successful issue, this entire 100 Crs goes towards the stated intent.

Liquidity is incidental, this is clearly not in the corporate agenda of companies.

Thats right. Once the company lists on the exchanges, the share price of the company has nothing to do with the operational activities of the company. Of course, soaring share price uplifts the mood of the employees and shareholders, but thats about it.

However, what really matters is that impacts the net-worth of its share holders which includes the promoters, employees, and literally anyone holding the companies shares.

Yes, this does help to extent, especially when the company decides to issue rights. The promoters can choose to raise additional capital from its existing shareholders by offering them new shares at a discounted price (generally lower than market price). Now, because the right issue comes at a discount and the share price is doing very well, the chances of rights being fully subscribed is high, and hence the company gets to raise additional capital from the existing share holders.

The secondary market is certainly not a zero sum game. Its a place where serious wealth gets created for both the promoters and its investors (long term especially). We have witnessed numerous examples of this in India - Reliance, Infosys , M&M, HDFC Bank, TCS, Kotak, Bajaj and the list just goes on. I’d suggest you read this book for more stories and inspiration of wealth creation from the secondary markets.

Happy investing!

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@Karthik Thanks for the answers!!

Zero sum game in the sense, that long term wealth that is created also comes from people’s demand(Paying higher prices for the same asset) right? It is not that the company is giving the shareholder a part of its profit which is real value that it has created through increased economic activity and efficiency.

What i am trying to ask is that: If whatever happens in the secondary market stays in the secondary market?

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Yup. It stays in secondary market in the context of what u r speaking…

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Yes, unless the company does buybacks, rights issues, OFS.

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Nicely explained in this video:

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Watched the video, Great Explanation of the topic

But

The video talked about how ethically calling the stock market is not right, like everybody wins when the market goes up and everybody loses when the market comes down. Absolutely right. But, For Example:

A gets the stock from a company for $5 [$5 goes from A’ pockets to the company]

B gets the stock from a A in the secondary market for $50 [$45 goes from B’s pockets to A’ Pockets]

And the transfer process goes on for both profits and losses…

In the end, I feel it is logically a zero sum game.

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A zero sum game is one where one person’s profit is at the expenses of other person’s losses.

In your example, A has made money but if the company keeps doing well, even B would make money. So, the profits A were NOT from the losses of B. It all boils down to the fact that a strong company makes every investor richer and a weak company makes every investor poorer.

At the best, you can call the secondary market as a game of musical chairs but definitely not a zero sum game.

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Its not a zero sum game !
I buy a stock at Rs.1, I sell it at Rs.2.
The next person buys at Rs2 and sell at Rs3
The next person buys at Rs3 and sell at Rs4
The next person buys at Rs4 and sell at Rs5…

For this exercise to be a zerosum game, somebody somewhere must be losing. Who is it in this case ? None !

Similar case for downside also.

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@p699
The people who are buying it at a higher price are losing the opportunity cost of buying it at a lower price

Buyers paying a higher price are giving money to the the seller who took advantage of the opportunity and bought it at a lower price

A’s profit = B’s bid - A’s buying price
There is the equality equation, that does not create new value but just transferres it from one person to another.

I am not trying to redicule the stock markets by saying that it’s a zero sum game but I am a participant. It’s a concept I’m trying to clarify

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Now comes the core question of all this, What is Value ? in stock markets.

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But everybody is earning equally instead of just few people.

According to me profits are being distributed and risks are being spread thin. Win win situation for everybody :grin:

Asking questions is good !

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According to me value is created by increasing economic activity and efficiency. For example: Reducing supply chain costs, increasing the demand for a company’s goods and services etc create revenues by operational activities. And financial markets are a byproduct of the operational activities of companies and the economy.

And yes asking questions is good, there must be more meaningful conversations on this platform!!

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Money is something which is never stationary. It is always in transition. Either ITS VALUE is getting appreciated or depreciated. The day it stagnates, it means this world has come to a halt. And we the people of stock market are working hard to keep the value of our money(that money which is in our possession) is always ahead of what this world is quoting it value to be. In simpler words, we are trying to keep ahead of general inflation. Instead of doing this we can always invest in a business and create “value” according to your definition. But see this… the total value of all the goods/commodities/services produced in this entire world is 8 trillion. Another $280 trillion is floating around trying to find a suitable/safe resting place, where it can grow. Imagine all that money is used to produce more Iphones, more Ferraris, more bollywood movies, think what will happen. This is impossible. Hence we are performing an important task of keeping the value of money afloat, of ours and our clients money, while it is not engaged in economic activity of the kind you mention. According to me this is quite an important task.

Imagine a large forest. Now imagine a small playground in the middle. That is the protected area($8T) meant for salaried class. They never realize that a large/wild area($280T) surrounds them and that is the real world. This real world is still governed by “Survival of fittest” principles. The playground is just an illusion. Be proud that you are unprotected and still survive and feed yourself, unlike them.

My understanding of economics is at best still “ABCD” level. Still I hope I made some sense here.

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Via the secondary market, you can purchase shares of a company and via corporate actions like dividend, bonus, splits you create wealth. Not to forget the capital appreciation in the stock price itself.

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Clear!! @Karthik