Hello and welcome to another In General, the Sunday segment where we can discuss anything and everything that relates to Magic the Gathering. I try to steer clear of the world of MtG finance, particularly in my writing. I deal with finance all day at work and I don't like to mix business and pleasure. But last week, I gave a discussion about why Magic sealed product don't experience a true market, particularly with regards to Magic Online.
This is part two of a four part saga about finance and Magic.
If you missed part one, check it out here: The Primary Market Price
In short, there is inside manipulation occurring that limits supply to artificially hold up prices. Obviously, this will have a significant impact on the value of your collection and your ability to increase that value over time. In this article, I will be explaining some of the problems with trying to use Magic as an investment in the Secondary Market, continuing my metaphor of using Magic cards as securities.
A Separation of Sellers and Buyers
First, let me explain what that means. A Primary Offering, is one that comes from the original issuer or producer, i.e. Wizards. Cards being sold from Wizards to stores are said to sold in the Primary market. A Secondary offering is one that happens between two parties who are not the original issuer. E.g. I sell a copy of Gifts Ungiven to Uncle Landdrops for a Snickers bar. You can see how this ends up creating an environment where there are issuers, brokers, and consumers, who all interact to create a market for the product.
If this sounds complex, don't adjust your TV screen, financial markets are so complex that they often become opaque. This makes it very difficult for the average consumer to make money buying and selling products in an open market. If you have ever known someone who has lost a lot of money speculating on the price of Magic cards you're about to learn why.
Factors that Limit Profits
Ask Price - This is the price that you have to pay if you want to buy a card from a dealer. The asking price is going to be as close to the real, current 'market price'.
Bid Price - This is the price that you would be given if you wanted to sell a card to a dealer. It will always be lower than the asking price because there is an expense to running a business and reselling the card. The bid price is closer to the real 'value' of a card than the ask price, but will usually be far below the 'market price'
The way to easily remember these two is this: You have to pay whatever the dealer ASKS, but when you sell, you will take whatever the highest BID is.
Spread - This is the difference between the ask and bid prices. This covers the dealer's expenses and profits and is often thought of as a sales charge. The spread can vary in size, but make no mistake, it is always a POSITIVE NUMBER. Businesses cannot reliably sustain transactions that don't make money.
The only way that you can really exchange a card for its real value is to trade it for another card that you value equally. The problem with this is that you are trading one SUBJECTIVELY VALUED, SPECULATIVE INVESTMENT for another one. Because of all the associated factors that are outside your control, it is going to be very difficult to amass any real economic gains over the long term.
Arbitrage - This is the act of buying something and then selling it in a different market to take advantage of a difference in pricing. These differences are a result of an inequality of information and only exist for a short time.
This is the holy grail of mercantilism: instant profit. The problem is that the prices are moving constantly and you might be the person who has the bad information, which creates a large risk.
So here is the squeeze. If you have to purchase the product at a premium and sell it at a discount, you are going to lose money unless the actual value of that product goes up dramatically. Sales charges cut directly into your gains. Also, some of the underlying appreciation of your card's value is being stolen away by successful arbitrage, which acts to quickly stabilize any movement in prices. Anyone who wants to really make some money buy investing in Magic has to take a broader approach and invest for the long term.
So there it is. This isn't an exhaustive list obviously, but I just want to give you a look at some of the problems that can stop you from making a profit trading Magic cards, even if it was heavy on theory.
That is all for this week. How are you enjoying the series so far? As always, your feedback is appreciated. Leave your thoughts in the comments below. I will see you next week for my discussion of how to successfully invest in MTG.
-GG
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