If you are thinking that investing in stocks is gambling, then you are equating investing to walking into a casino and rolling the dice.
You are also totally disregarding the financial acumen of top financial experts who trained for years to understand the intricacies of financial statements, mergers and acquisitions, dividend policies, initial public offerings (IPOs), financial regulations, and the economy at large.
Warren Buffet hasn’t built up a portfolio of billions because he gambles on the stock market.
He has said time and time again that he spends most of his days reading and thinking. His reading material includes six newspapers every day: The Wall Street Journal, The Financial Times, The New York Times, The USA Today, The Omaha World-Herald, and American Banker.
To invest successfully in the stock market requires knowledge and many people are not interested in studying market trends, or simply don’t have the time to do so. The stock market is a vehicle for building wealth over time by leveraging available information and analyzing it to make well-considered investment decisions.
Why investing in the stock market is not gambling
Investing in stocks isn’t like betting on a horse or playing poker.
You don’t sit down and play for a few hours, hoping for a huge payout after a few hours. Investing in stocks is a playing the long game; it’s a strategy that requires certain informed actions now for a substantial reward much, much later.
There are, and always will be, those who treat the stock market as a gambling platform, but they usually go bust. For the discerning investor who is focused on wealth-building, investing and trading stocks is a serious business.
Before they buy shares in a company, they seek answers to these and other questions:
- How well is the company run?
- Who is the management team?
- How does the company make money?
- Where is the company’s growth coming from?
- Who are the competitors?
- Can the company outcompete against its rivals?
- How does the company’s valuation compare against competitors?
- What is the company’s competitive advantage?
If the answers to these questions lead the investor to believe that the stock price will rise in the short or long term, and that they’re willing to hold onto the shares for a long time, it’s a good time to buy. This decision is based on thorough research and analysis, not how the cards my fall, or the dice may land.
All investors stand a fair chance in the stock market given a long enough investment time. With gambling, the odds are stacked heavily in favor of the house.
How investing in stocks is completely different from gambling
Investing in stocks is inherently different from gambling for a number of reasons, but the most important one is that shares represent partial ownership in a company – even if it is only a fraction.
Think about it; stocks provides the investor with a stake in the company. With gambling, what does your money buy? Certainly not a stake in a casino or a racing horse.
Partial ownership confers certain rights to investors:
- The right to share in the company’s profitability due to stock price appreciation.
- The right to cash or stock payments, i.e., dividends.
- The right to participate in the election of the board of directors, from whom the CEO will be chosen.
- The right to buy new shares before they’re offered to new shareholders.
Investors who bought shares in a company enjoy larger proportional ownership of the company and of course, a larger proportional share in the profits.
Gambling doesn’t offer these or any other benefits.
Why playing the stock market may look like gambling
Stock prices frequently fluctuate, increasing or decreasing in value throughout the trading day.
As with any other market, supply and demand determine the price of stocks. Stock prices rise when there are more buyers than sellers and prices fall when more investors are selling than buying.
Demand is closely linked to four factors: company earnings, the economy, news, and market sentiment.
I. Company earnings
Stock prices generally rise when companies report positive earnings performance and are positive about future earnings. Investors will be willing to pay a higher price for shares in companies with above-average earnings growth.
II. Economic factors
Economic factors that influence stock prices include interest rates, unemployment, inflation, and currency fluctuations.
Markets and economies don’t operate in isolation. They are interconnected, and news in one country impacts markets in another country. The global political situation, international events like a pandemic, natural disasters, and other unforeseen circumstances can affect stocks and the stock market. In addition, news about negotiations between companies, mergers and acquisitions, product breakthroughs, and remarks posted by CEOs on social media also influences investor sentiment.
IV. Market Sentiment
Market sentiment is the average attitude and feeling of investors about a market or stock. This psychological factor is hard to pinpoint and often doesn’t make sense to an objective observer.
Market sentiment affects the market when investors fixate on a piece of news and then act in a way that either boosts a stock’s price or keeps it artificially low.
All these factors and others cause stock price fluctuations. If stock prices fluctuate rapidly in a short period, recording new highs and lows, the market is said to be volatile.
The stock market as a whole can experience volatility, as can individual company stocks. The degree of volatility of a stock is indicated by how much its price deviates from its average price. A big deviation indicates severe volatility.
External events that create uncertainty, such as the COVID-19 pandemic, often cause or increase stock market volatility.
Price fluctuations and volatile markets, which make investments riskier, can give the impression that investing in the stock market is nothing less than gambling.
It’s difficult to find stocks worth investing in
Unlike gambling, which involves a chance decision, assessing the future earnings potential of a company is a complex undertaking.
Most investors require help with this. Some use investment research software and other tools to measure performance, and others consult experts and stock picking services or investment newsletters to find stocks worth investing in.
Thousands of investors consult Motley Fool’s Stock Advisor for advice on hot companies that show consistent growth and are projected to continue their trajectory.
In the words of one Investopedia writer: to invest is easy; to invest successfully is tough.
The difference between investing and gambling
I. The risk factor
It goes without saying that both investing in the stock market and gambling in any form involve risk. Both activities also require capital to participate. Both activities are aimed at earning the player money.
That’s where the similarities end.
For the most part, investors don’t take risk on blindly. Because they have examined the companies they want to invest in, they know the potential risks involved. Investors calculate risk-adjusted returns and diversify their investments across multiple assets to minimize risk.
With a diversified portfolio, if one asset class is exposed to risk, the others will minimize the size of the loss, because not all of the investments will be affected.
Gambling risk cannot be spread, unless you bet your money bit by bit and know when to stop. A gambler can’t really contain risk.
II. Limiting losses through risk mitigation strategies
There are several loss mitigating strategies open to investors. One is the so-called stop-loss, which allows investors to stop a loss by selling a stock if it falls to a certain level. Some investors routinely put a stop-loss order of 5-10% below their purchase price to limit risk.
Another common strategy is to buy put options, which is a bet that the underlying stock will go down in price. The put gives investors the option to sell at a certain price at a specific point in the future.
Gambling is an all-or-nothing game. If you win, fine; if you lose, you lose everything.
III Time frame
Investing and gambling have different time frames for return. An investor must wait for a period before receiving any rewards from the investment.
Certain investments can also provide a passive income stream over many years in the form of interest or dividends. Investors can also earn additional income from capital gains when a property investment has been made. With gambling, there is no time period: you make a bet and it pays out immediately or not, except for government-controlled gambling like the Powerball, where winners can choose to take their winnings as an annuity.
IV Available Information
Also, the availability of information is different. Investors have many sources of information at their disposal to help them make sound investment decisions.
You can use the information to analyze the market, investigate different companies, and learn about all the investment options available. New and experienced investors can take tips from experts on how to limit risk as well as investment best practices. The sources of information are virtually limitless and include:
- Annual reports
- Financial statements
- Analyst reports
- Stock news apps
- Stock tracking and portfolio management apps
- Investment research websites
- Stock advisor websites
- Financial newspapers
It is not in the nature of gambling to provide a list of rules or a number of tips to ensure an afternoon at the casino or on the race course will be profitable for gamblers. On the contrary, the less they know, the more money casinos and bookies make.
V The chances of success differ the longer you’re involved
Investing is a form of saving. It’s the type of saving that gets better with time – the longer you stay in the stock market, the better your chances of a good return.
When you invest, you are using your money to make more money. The longer you leave it to grow, the better. Time is an important aspect of investing. If you have a long-term investment, it can provide significant gains over time.
Gambling is the opposite – the longer you gamble, the worse your odds get.
VI The aims are not the same
Gambles risk their money on a horse, a game, or a hand of cards to win. Investing is not about winning; it’s about a long-term plan to build financial independence. Serious investors build something; they build a solid portfolio for a specific purpose. Gamblers build nothing. They spend idle time doing nothing of value and want to be paid for it.
When is investing in stocks gambling?
Some investors show gambling tendencies when investing in the stock market. This is true of people who trade for excitement or social proofing reasons, only trades to win.
Investment for social proofing reasons happens when people start trading or investing because people in their social circle do.
While making trades or investing under social pressure is not gambling per se, but if the person is inexperienced and only follows the example of others, it is a gamble. In these cases, people are entering into financial transactions without the necessary knowledge to mitigate risk.
When a person trades for the sake of the excitement of the activity, and let’s face it, it is exciting, they run the risk of not doing trades or investments with a clear head.
It’s easy to get caught up in all the excitement, the highs and the lows, but it can cause an otherwise sensible person to make short-sighted judgments in moments of excitement.
Gambling is a numbers game with the odds stacked against gamblers. With thorough research and analysis, and an assessment of probable risks, investors can turn the odds of winning in their favor, something that gambling doesn’t allow.
Investing in the stock market always involves risk because markets and stock prices fluctuate, and unforeseen things can happen.
But disciplined investors can inform themselves properly about all their investment options and mitigate investment risks by building a diversified portfolio and staying in the market regardless of fluctuations.