The stock market is not gambling. It’s closer to a horse race than it is to a casino game. Betting on stocks is similar to picking horses in a horse race, where you are attempting to choose the fastest horse or the one with the best chance of winning, just like picking which stock has the best chance of rising in price. All too often, instead of screening and researching stocks individually, investors rely on “tips” from other people.
If there is one thing I have learned from studying Wall Street over the past decade it’s that trading tips with other people is very dangerous.
What is the Difference?
Now that we have concluded that the stock market and gambling don’t belong in the same sentence let’s find out what the main difference is. On younganinvested.com you can read that the stock market is not based on chance like in casinos or horse tracks and instead it is a market where people who invest can make money by buying stocks through several methods. These methods are for example buy low sell high, value investing, long term investing etc.
Investors who are just starting out or investors who are disgruntled, because of mounting losses shouldn’t believe that gambling and investing in the stock market are related. When you invest in the correct way and do so through a long period can lead to consistent returns over a long period of time.
Gambling is entirely different where the money that the person who is gambling loses goes to the bookmaker, the casino or the racetrack. Either you win or you lose there are no other outcomes. In the stock market there are several outcomes: you can win, you can lose, your shares can drop in value, your shares can increase in value and rewards like dividends and voting rights can be available to you.
The decision making process is also very different. Stocks can be researched and when you research the company you plan to invest in you are able to calculate things such as the fair value of the stock. Moving on you are also able to use risk mitigation methods to lose less money. Gambling has almost no decision making process and at the most you can research the odds, look at what players are injured or look at stats.
The Dangers Of Believing The Stock Market Is Similar To Gambling
On the same source youngandinvested.com it is stated that investors who treat the stock market like gambling face several dangers. They can place their money in danger by not selling their shares and missing out on their gains. They also run the risk of losing their money altogether.
Of course investing in stocks involves several risks, but so does everything in life. You have to manage that risk and use it to your advantage. When you gamble the casino or bookmaker you choose to gamble your money with doesn’t rely on blackjack to be performing better than the roulette table and the required minimum bet ranges don’t go down. Gambling is a numbers game and the odds always favours the house, because all casinos and bookmarkers are constructed in a way to only allow a few winners.
Investing on the other hand requires a particular thought process that involves researching and carefully analysing different companies. You need to assess the risk factors, potential returns over a year and the board members etc. In the stock market any investor can win over time or by short term trading. No one is controlling the stock market, it is just being regulated by various different rules. Unfortunately there are some people who think that gambling and stock market investing are the same, and that makes them avoid investing in stock altogether.
What is Investing Defined as?
On investopedia.com investing is defined as “the act of allocating funds or committing capital to an asset, like stocks, with the expectation of generating an income or a profit.”
One of the core principles of investing is the expectation of a greater return on your investment in the form of regular dividends or price appreciation.
Risk and return cohere when investing, because low risk equals low expected returns and high risk equals a higher potential reward. Investors must therefore choose how much money they are willing to lose if the shares they buy depreciate. Most traders elect to risk 2–5% of their money on a trade they want to make. Investors who want to invest over a longer period of time elect to diversify their portfolio and spread out the risk. Risk and potential returns often vary throughout different industries. “For example a blue-chip stock that trades on the New York Stock Exchange will have a very different risk-return profile from a micro-cap stock that trades on a small exchange.”
This means that a strategy for minimising your risk while investing is spreading your money across different types of stocks and funds. To enhance the performance of their portfolio some stock market investors carefully monitor the patterns the stock charts are displaying. Technicians that work on stock exchanges try to foresee where the stock is likely to be priced at in the future.
What is Gambling Defined as?
According to the same source investopedia.com gambling is “defined as staking something on a contingency. Also known as betting or wagering, it means risking money on an event that has an uncertain outcome and heavily involves chance.”
Professional gamblers weigh the capital they want to use when gambling imo. Investopedia equates this to all gamblers which is something that I highly disagree with. The reason being that gamblers who don’t gamble professionally usually just bets on their favourite team or bets on the underdog. They don’t weigh the capital they plan to gamble on; it is an adrenaline rush to gamble in casinos, racetracks and betting on sports games.
In general the odds are already against gamblers from the very beginning, because the high probability of losing is much higher than the probability of winning. A gambler has a much lower chance of profiting if they have to place an additional amount of money on their bet. This is usually referred to as points and these points are kept by the house even if the bettor wins. This is a way for the casino or bookmaker to insulate themselves from losing money.
Summary
To summarise this article it is important to understand that the stock market is not at all equal or similar to gambling. Odds are not involved and much research, analysis and risk assessment is required to be a good investor. This myth is usually spread by disgruntled investors who don’t put the time and effort into researching their investments beforehand. Finally the money that is lost in gambling goes to the casino, the racetrack or the bookmaker etc. When you sell your shares at a lesser price than you bought them for, all the money is kept by you. The money that was lost through depreciation of your shares’ total value.
