Share Market Is Gambling Or Not

‘Share market basics for new investors’ is a series of articles written to explain the basic fundamentals of the share market. In these articles, we will talk about the “street smart” knowledge investors need to be successful.

• Taking Free tips/recommendations: If you are serious about investing in stocks and making money.
• According to FanDuel, banks such as JPMorgan Chase, Bank of America, Capital One, Union Bank and Huntington Bank do not allow their debit and credit cards to be used for online gambling. The worry is that these sites can be used for money laundering and fraud, and banks do not want to run into trouble from federal regulators and prosecutors for.

It is a general myth that share investing is like gambling. Most people come to this conclusion based on their following experience –

1. Just like in gambling, people lose money in the stock market.
2. Regardless of how much one analyzes the shares, there is significant information of companies that investors do not have. Hence investing feels like rolling the dice.
3. Both involve risk and choice.

Whether it is related to Bitcoin or mainstream stocks, Day Trading is the new “sexy” that gets an inordinate amount of hype. There are lots of sites that claim to; “turn you into an instant.

Yes, one can inherently turn stock investing into gambling by taking unnecessarily high risks, by following unproven ‘market tips’, and by over leveraging.

There are some similarities between investing and gambling –

1. Taking risks in the hope of gaining an advantage.
2. Betting against an uncertain outcome.

In investing, the odds are in your favor, where as in gambling the odds are against you. This is primarily because time is on your side.

“An investment is simply a gamble in which you’ve managed to tilt the odds in your favor.” – Peter Lynch

So why is investing not same as gambling? Here are some of the reasons.

1. Gambling is time bound whereas investment can span over several years. The outcome of a bet placed in a casino is pretty much instantaneous.
2. In gambling, it is very likely to lose the entire bet. In investing, one can control the amount at risk by setting a stop loss.
3. If you shares lose value, you can still hold on to the shares. The value can increase in future.
4. In gambling, the odds are in the favour of the house, whereas the odds are in favour of the investor. This is because, in the long run, the stock markets generally tend to go higher.
5. Gambling is a zero-sum game. In other words money is transferred from losers to winners. There is no net gain. However, when you buy shares of a company, your money is put to use by the company that produces something. As the value of the company goes up (or down), so does the value of its shares.
6. Investors are risk averse, whereas gamblers are risk takers. Gamblers go to a casino to convert Rs.100 into Rs. 1000. Investors seek a reasonable return.

The next time you hear someone say that stock investing is the same as gambling, remind them that in fact there are some similarities and some major differences. Both activities involve risk of capital with hopes of future profit. Gambling is typically a short-lived activity, while stock investing can last a lifetime. Some companies actually pay you money in the form of dividends to go along with an ownership stake.

Share Market Is Gambling Or Not Working

Here’s additional reading from Baylor University and The Wall Street Journal.

Did you find this article in the series of Share Market Basics useful? Thoughts welcome!

Is the stock market gambling? Should people consider trading in the stock market to be a form of gambling? The answers to these questions are an unequivocal – No! Investing in the stock market is not gambling, and novice investors should not think of it in that way.

Equating the stock market to gambling is a myth that people on the internet and television pundits have perpetuated for years. And, it’s simply not true.

While investing and gambling have a few similar characteristics, they are very much different. And, if an investor does not take trading stocks or buying shares of mutual funds seriously and equates it to gambling, they are in serious jeopardy of losing money or missing out on gains from the stock market that they need for retirement.

Why Stock Trading Is Not Gambling

Stock Is Ownership

Investors must remember that they are purchasing ownership in a company when they buy shares of common stock. Investors own a very small portion of the company. That’s why I love buying cans of Dr. Pepper. It feels like more money is ultimately going back into my pocket with every sip.

Buying shares of a company is equivalent to having a claim on the assets, debts, and more importantly a small fraction of the profits of the company whose shares you buy. Far too often, investors look at buying shares of a company simply as trading stocks. They forget that they are now owners of the company too.

To gain an advantage and earn a profit on your stock trading, investors must try to gauge the company and its profitability. Incorrectly gauging profitability in the short and, more importantly, over the long term is why stock prices fluctuate on the stock exchanges.

The profit outlook for business is always changing, and investors are using stock charts, news, rumors, company metrics, and fundamental analysis to estimate the future earnings of a company and subsequently the value of its stock in the future.

The Value of a Company

Trying to determine the value of a company’s stock price and where it’s going in the future isn’t easy. There are a lot of different variables that move the short-term price of a company’s stock. They often appear to be random, but they’re not really.

Over the long term, a company’s stock is the present value of all profits that the company will make. In the short term, a company’s share price is a lot more volatile. A company can trade shares even without profits because investors think that the company will have future earnings. But, eventually, a company’s stock price will show the true value of the company.

Similarities in Investing and Gambling Strategies

Studying Behavior

Investors and gamblers study odds and look for an edge to enhance their performance. With gambling, especially games like blackjack and poker, players study behavior. They look at the mannerisms and patterns of their opponents. This helps them gain useful information to influence their betting and strategy.

Investors study trading patterns through stock charts to predict a stock’s price the in the future. Investors have a distinct advantage with gaining information. Company information is readily available on the internet and through company filings with the Security and Exchange Commission (SEC). Investors can find a wealth of information in the SEC’s Edgar database on company stock filings.

Share Market Is Gambling Or Not Allowed

In the Edgar database and company filings, you can find out the types of assets that companies hold and if they are a holding company that other firms underneath its umbrella. For example, 888casino.com is a well-known online casino brand of 888holdingsplc.com. It has many other brands such as 888.com, 777.com, 888poker.com, 888sport.com etc. And, 888holdings Plc actually has shares of stock that trade on the London stock exchange. (symbol 888). So, imagine you invest in the 888holdings share and also play online at their 888casino, that will make you an investor and a gambler at the same time.

Share Market Is Gambling Or Not Applicable

Risk

Both investing and gambling involve risk. You have to risk capital in order to gain value in both the stock market and a casino. It is the risk that investors and gamblers take on that gives them the right to earn more than they wagered.

Both investors and gamblers must know how much risk they can tolerate, though. Every investor and gambler has a certain risk tolerance that they are willing to lose. You must know your risk tolerance before you start investing or gambling. Not knowing when to stop or sell will make you vulnerable to potentially losing more than you intended.

Differences in Investing Strategies and Gambling

Zero Sum Game

Unlike investing where there are moderate winners and even some losers over the long and short term, gambling is a zero-sum game. There has to be a winner and a loser with gambling. Gambling takes money from a loser and gives the same money over to a winner every time.

In investing, there can be varying degrees of winners and losers. There can be total losers or total winners, but because investors buy and sell instead of waiting for a gambling hand to be completely over, they can have partial winners and partial losers.

But, with gambling, no value is ever created. The value or money wagered is simply transferred from one gambler to another. Investing increases the overall wealth of the economy. With investing, companies increase their productivity and develop new products that improve people’s lives. Companies create profits and share those profits through dividends to investors. Investing creates wealth over the very long-term for investors and is not the same as gambling’s zero-sum game.

Limits to Investing Losses

Investors can often limit their losses and get out of a trade if they start to lose money. Stock investors can establish a trading order called a stop loss with their broker or online brokerage firm to limit their losses. I often immediately place a stop loss order after purchasing shares 10% lower than my purchase price on the off chance that the company is hit by a selling frenzy before I can get in to sell my shares.

Share Market Is Gambling Or Not Recognized

Sometimes, I’ll place a similar limit order when I’m swing trading to sell shares at my target upside price as well to lock in my target profit margin. Many times I’m looking for a 10% raise in a stock when I’m swing trading, and I routinely place limit orders as soon as I buy a stock.

With a stop loss order placed, I will only lose 10% if a stock drops in value below what I purchased it for. This helps me sell the stock to someone else and retain 90% of my capital, limited my downside risk.

Time Horizons for Trading and Gambling

Time horizons are another difference between investing and gambling. They are different than gambling even if you’re day trading, swing trading, or simply buying and holding your investments. Most gambling is a time-based event that has a set end time or date where you find out whether you’ve won or lost your bet. Investing can continue indefinitely in some cases.

Many companies pay dividends to investors and reward them for purchased shares for years. You can lose money on paper as your investment value declines, but dividend paying stocks will continue to pay you typically each quarter to wait for a rebound. With gambling, you either have to win or lose the money that you bet. There is no middle ground.

Limited Information

Unlike investing, there is only a limited amount of information while you are gambling. You may be able to pick up a few signals from the table or hear a few grumbles from your fellow blackjack players at a casino on whether or not the table is hot or cold. But, that’s about all of the information that you’ll get.

Investing is completely different. There is a plethora of information about the companies you invest in through online forums, stock analysts’ reports, conference calls, company filings, and the like. While gamblers are almost blind to any inside information that can help them get an edge on their competition.

Gambling and investing have a lot of similarities. But, they are also very different. Investing in the stock market is not gambling.

Equating the stock market to gambling is a myth that is simply not true. Both involve risk and each looks to maximize profit, but investing is not gambling. And, gambling is not investing. Each plays a unique role in our society, but investors should not confuse where the similarities end and make each one unique from the other.

What do you think? Is the stock market gambling? Do you consider trading in the stock market to be a form of gambling? Why? I’d love to hear your thoughts in the comment section below.