What is a Zero-Sum Game?

In finance, a zero-sum game refers to trades or investments in which one investor gains when another investor loses.

How Does a Zero-Sum Game Work?

Futures and options trading is generally a zero-sum game; that is, if somebody makes a million dollars, somebody else loses a million dollars. The downside is unlimited.

Let's say IBM stock is trading at $100 per share. Now let's say Investor A purchases a call option on IBM from Investor B. A few weeks later, IBM is trading at $105 a share. The call option gives Investor A the right to purchase shares of IBM at $100 per share from Investor B. In this scenario, the buyer could use the option to purchase those shares at $100, then immediately sell those same shares in the open market for $105. Investor A wins, because he gets to buy something for $100 and immediately resell it for $105. Investor B loses by the same amount, because he has something worth $105 but has to sell it for $100. The $5 that Investor A gains is $5 that Investor B loses.

Why Does a Zero-Sum Game Matter?

Zero-sum games are essentially bets. In the financial markets, for instance, speculators essentially place bets on the future prices of certain commodities. Thus, if you disagree with the consensus that wheat prices are going to fall, you might buy a futures contract. If your prediction is right and wheat prices increase, you could make money by selling the futures contract (which is now worth a lot more) before it expires (this prevents you from having to take delivery of the wheat as well). Zero-sum games have a bigger purpose in the markets, however; they provide a lot of liquidity to the futures market and help companies find a way to stabilize their prices and thus their operations and financial performance.

Ask an Expert about Zero-Sum Game

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Zero-Sum Game.

Be the first to ask a question

If you have a question about Zero-Sum Game, then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

Verified Content You Can Trust
verified   Certified Expertsverified   5,000+ Research Pagesverified   5+ Million Users