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 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 company’s profits 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 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 a company’s future earnings 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
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 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 holding companies 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, which will make you an investor and a gambler at the same time.
Both investing and gambling involve risk. You have to risk capital to gain value in both the stock market and a casino. The risk that investors and gamblers take on 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 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 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 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 a selling frenzy hits the company 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 and lock in my target profit margin. I often look for a 10% rise in 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 with 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.
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. In comparison, gamblers are almost blind to any inside information that can help them get an edge on their competition.
If you’re looking for places to keep traditional investment accounts, you might want to check out investing with M1 Finance, Robinhood, Betterment, or Stash Invest.
M1 Finance simplifies the investment process for beginning and experienced investors alike. M1 Finance does not charge a fee per trade, and it gives you the option of taking more control over your investments if you want them (and less if you don’t). M1 Finance is great for buy and hold investors.
Is Options Trading Gambling?
If you’ve ever been told that options trading is gambling, then you’re missing the point of options trading. Is options trading gambling? Options trading is not gambling. It’s an investment strategy that can provide several benefits when done correctly.
Options trading is the buying and selling of contracts that give you the right to purchase a stock at a specific price in the future. What it boils down to is this: If you think the value of your stock will increase (or stay about where it is), then buy an option contract. Options trading has been around for over 100 years now and can protect against losses or make money with small investments.
Options trading is a way to trade without having the money in your account at the time of purchase. It is an agreement between you and the seller to buy or sell something at a predetermined price on or before a future date. This can be used for stocks, commodities, options, futures contracts, etc.
The advantage of buying option contracts rather than shares themselves is that if you are right about what direction an asset will go in but wrong about how far it will go (i.e., not enough capital), then with options only covering one side of the market (either long or short) you would only lose as much as the cost of the option itself instead of potentially losing all your investment upfront like when buying a stock outright.
Is Forex Gambling?
If you’re looking to get into Forex investing, the last thing you want to be told is that it’s a gamble. Is forex gambling?
Forex stands for foreign exchange, and it’s all about buying one currency with another. Forex is an electronic market where traders can buy and sell currencies from all over the world. Unlike stocks, there are never any middlemen in forex trading as trades are made directly between two parties. The trade happens instantly with no margin calls or broker fees involved creating high potential returns on investment.
If you are a forex investor, you have probably been called a gambler at one point or another. Although this may be true in some cases, it is not always the case. Traders of Forex can either make trades for short-term speculation (usually intra-day), or they can trade to hold until maturity and get their investment back plus interest over time.
These traders rely on mathematical formulas to determine what price they should buy and sell currencies at to profit from changes in exchange rates between different countries’ currencies.
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.