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Tin Mervin Yeung wrote:
> In equity markets, if the market rises, the holders of equities are
> making money and so it is fair for them to pay the income tax. (because
> value is being created. ) In derivative markets, however, since it is a
> zero-sum game(no new value is being created), the only thing happens
> here is the exchange of money (money flows from losers to winners). Is
> it fair for the government to tax the winners without compensation to
> the losers?
This certainly isn't the case with futures, as they can appreciate in value
the same way stocks do. With options, however, there is no real value
apart from money being shifted around through sort of side bets between
participants on the underlying securities. I don't see, however, how it
would not be fair to tax profits in the same manner as other income is
taxed, though. Tax rates aren't formulated on the basis of how easily or
how difficult the income was obtained, nor should they be.
> Can this argument be justified to persuade people to buy stocks instead
> of trading futures and options?
I wonder about this from time to time. On the one hand, futures players
are more leveraged (although doubling RegT margin will help a lot here),
and on the other, I would expect the level of competition to be quite a bit
higher as well, since traders are pretty much playing the same game, which
I assume would make it more difficult to get good entries and exits. I
trade stocks myself, and while the amount of day traders has increased
dramatically over the last few years, this has actually helped, and this is
still pretty much wide open country for the nimble. In my view, it would
be easier to gain an advantage, since the overwhelming majority of trades
are still done by behemoth funds or amateurs using slow web brokers and
limited skill. Still, though, none of this is easy to be sure,
Here's something interesting though - why do almost all investors make
money, while the majority of traders end up failing, when trading can be
much more efficient? Especially in cases when they're trading the same
thing? Fact is, while the benefits are increased, so is the difficulty,
and the real kicker here is having to sweat out the play live versus
checking it far less often. The opportunities to botch the thing are
dramatically increased as a result, and those who haven't acquired the
proper amount of skill, resolve, confidence, and fortitude are much more
subject to errors resulting in losses.
Regards,
A.J.
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