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.
- Is Playing The Stock Market Like Gambling
- Is Trading Gambling
- Is Investing In The Stock Market Like Gambling
- Gambling Vs Stock Market
- Is Stock Market Gambling Islam
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.
Investing in the stock market is like owning a casino. Actively trading, failing to do any due diligence, and concentrating into a handful of unresearched investments is like trying to get rich playing video poker. Finally, I would like to conclude that the stock market is not gambling at all. If we compare our investments in stock markets its far less than with that of developed countries. In India, only 2 – 3% of people have invested in the market. Dear reader, it’s our hard-earned money so we have to decide how can we create our wealth.
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 the 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.
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.
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 have 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.
Is Playing The Stock Market Like Gambling
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 immediate 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.
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.
Is Trading Gambling
Equating the stock market to gambling is a myth that is simply not true. Both involve risk and each look to maximize profit, but investing is not gambling. And, gambling is not investing. Each play 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.
Warren Buffett has a message for Main Street investors: Treating the stock market like a casino is a bad bet.
The CEO and chairman of Berkshire Hathaway warns that wagering on stocks with borrowed money or loading up on exotic investments is akin to gambling. Investing in well-run companies whose products generate strong sales and profits is a better long-term investment strategy than a get-rich-quick approach.
“A lot of people like to gamble in the stock market,” the billionaire investor, who released his closely watched annual letter to shareholders over the weekend, said Monday in an interview with CNBC. “It is insane. To risk starting all over again and losing everything is madness.'
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Buffett's comments come amid a volatile period for the stock market, including its first 10% plunge in two years this month. The bull market, which turns 9 next month, has helped the Dow Jones industrial average quadruple in value since March 2009.
Signs of investors treating Wall Street like a Las Vegas casino are cropping up more frequently.
At the end of January, investors had a record $665.7 billion in borrowed money, or 'margin debt,' invested in all sorts of securities, according to the Financial Industry Regulatory Authority. The risk, FINRA says, is if the price of an investment bought on margin plunges, investors might have to raise cash to meet the minimum balance requirements in their brokerage accounts. These so-called 'margin calls' often result in forced selling of stocks by investors to get the needed cash.
'There's no reason to borrow money against stocks unless you are in a hurry to get rich and willing to go broke,' Buffett said.
Another sign of investors taking more risk, Buffett said, is the mania surrounding digital currencies such as bitcoin and the buying of 'super-charged' index funds that bet on things such as market volatility, rather than a company such as Apple that sells in-demand products and earns sizable profits.
'There are ways to get rich slowly,' Buffett said.
He said investors must realize that it's impossible to predict what will happen in markets or the world and that the only way to survive bad times is to invest in companies that are strong enough to weather catastrophic events.
Even though Berkshire Hathaway has $116 billion in cash available for investment, Buffett says his disciplined approach keeps him and his company out of danger.
The Oracle of Omaha shared other investment tidbits:
Buying stocks is a good deal
While Buffett thinks the market for acquisitions — or buying entire companies — is too pricey, investors can purchase company shares at much better prices, he said.
Is Investing In The Stock Market Like Gambling
The reason: When purchasing a company, the buyer normally pays a “premium” price to get a deal done. The price of the actual stock has no such premium built in, the famed value investor said.
Gambling Vs Stock Market
Don't count on dividend payout
While Buffett is sitting on a pile of cash, he downplayed, as he always does, the chances of Berkshire giving back some of the cash to shareholders via a one-time cash dividend or by starting a regular dividend payout. Berkshire doesn't pay dividends. Buying back Berkshire shares is a more likely use of the extra cash, Buffett said.
He noted that once you pay a regular dividend, shareholders think you will 'pay it forever.' In contrast, buybacks, he said, boosts a firm's earnings per share, which 'provides ongoing benefits to shareholders.'
Buffett did say that he may lower the bar for stock buybacks. Currently, he won't buy back shares until the conglomerate's stock is trading at 1.2 times its price-to-book value, which is below the current 1.6 times book and way cheaper than the 3.4 times book the broad market trades at, according to Cathy Seifert, an analyst at CFRA, a Wall Street research firm. Buffett said he may consider boosting the threshold to 1.27 times book value, which moves Berkshire closer to a buyback program.
How to create 'income' with Berkshire shares
Even without a dividend payout, Buffett said there’s a way for investors to generate income off of their Berkshire stock holdings.
'You can sell a little piece of Berkshire each year and still end up owning more of it,' noting that shares typically rise in value each year. 'It's the equivalent of a dividend.'