Friday 13 May 2022

Is the Stock Market like Gambling?

Stock Market vs Gambling

There are many instances on chat forums, Q&A websites, and blogs where you will come across arguments regarding similarities in stock market investment and gambling. From a beginner's perspective, all these justifications may look relevant and good enough to deter them from investing in the stock market.   


Is the Stock Market like Gambling?

But remember, even if there seems to be a superficial similarity between stock investment and gambling, there is a fundamental difference in their functioning. I believe that investing is not similar to gambling. You need proper knowledge in investing and trading. If you are a beginner, then you can join a stock market course. There are many institutes in the market which provide the course. The Thought Tree is one such institute. Using a stock screener can help investors make informed decisions in the stock market, differentiating it from pure gambling.

Let's look at why some people compare investment in the stock market with gambling and arguments against such propositions.

Similarities between Investment and Gambling

Firstly, we will look at the surface-level similarities that make these two distinct aspects look similar.

  • Investing in the stock market and gambling at the casino both involve risks and choices that are to be taken when compared to abstaining from both.
  • Both the gamblers and investors specifically take a risk on their capital with hopes of future profit and substantial gains. They carefully weigh the money they want to put in play or invest.
  • Gambling and investing work on the principle of minimizing risk while maximizing reward. Both persons will avoid and mitigate unnecessary risks but take probable chances.
  • As opposed to investment, stock trading does carry similar characteristics as gambling and may result in similar situations of loss and profit due to high market volatility in the short term.

However, this is where the investment in the stock market and gambling stop being similarities and rather turn out to be antithetical.

Difference between Investment and Gambling

Gambling involves wagering your money on quick but uncertain outcomes, whereas investment involves allocating funds to generate profit in the long term. Gambling involves looking at the current situation and predicting the future; investment is based on more in-depth analysis and understanding. In short, comparing stock market investment and gambling is like comparing modern agriculture with ancient hunting and gathering strategies. Below are the features of stock market investing which make it better than simple gambling.

Longer Duration

Gambling is usually a transient hobby, whereas investment in stocks can last a lifetime. Gamblers generally have a negative rate of return on average and over time. Still, investment in the stock market usually has a positive rate of return in general and over an extended time. Gambling is a time-limited activity; once the match, event, or deal is done, so is your chance to benefit from the gamble. Unlike gambling, share market investment is a constant process instead of a win-or-lose situation.

Guaranteed Returns

A crucial principle in gambling and investing is limiting risk and enhancing rewards. But when it relates to gambling, the casino always has the upper hand, putting the gambler at risk the further they play. On the other hand, the stock market continues to improve as companies' equity rises with innovation and better services over time. Dividend payments to shareholders are also a part of the regular operation and are a vital component of capital gains over time. Simply put, if you carry on playing, the probabilities will eventually work in your favour as an investor rather than against you as a gambler.

Risk Mitigation

Partially cashing out, unconstrained share withdrawals, and diversified investment options can all help to avoid huge capital losses. Creating stop-loss tabs on any stock portfolio is another easy technique to avoid taking on too much risk. There are few techniques to restrict your losses in gambling since there are no loss-mitigation solutions. Gambles on any result will only be compensated if the wager is successful. In contrast to gambling, there are strategies to decrease losses in stock investing even after you have committed your capital. Therefore, your money is safer and not prone to simple volatility while investing in the stock market.

Availability of Information

The public has access to company and industry data and examining previous performance, and current situations can enlighten investors. Research and study of the company's earnings, financial parameters, and management teams can be done before committing your capital. Entrepreneurs who conduct dozens of trades per day can utilize the previous day's operations to make an informed decision. On the other hand, gambling lacks reliable records, and such knowledge will not even help improve wager success.

Investment is a better way of generating passive income instead of savings. However, if you don't take the time to understand the market and are involved in arbitrary investment, you may incur losses. We would like to re-emphasize that stock market investment is not similar to gambling but is not better than a gamble if done improperly.

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