Investing in the stock market is a common source of income for many people. But sometimes, stock market investments are compared to gambling. Learn why the stock market is not gambling.
While there are some commonalities, stock market investing is NOT gambling. This conclusion comes from several factors, including the fact that you own part of a company when you have its stock. Another reason is that following certain strategies leads to better returns.
Discover more about the connection between trading stocks and gambling, including why some people compare the two and why they are not equivalent.
Is the Stock Market Gambling?
When people start to have disposable income, one of the most common suggestions is to invest it in stocks. Most financial experts suggest the stock market as an excellent future investment and caution against gambling.
But to some people, the two seem very similar. After all, a stock could crash and leave you with nothing or rise dramatically and give you significant profits. Both of these are also potential outcomes for gambling. To make it more complicated, to those without any knowledge of the stock market, it may seem as if investors are just making guesses, leading to the assumption that it is gambling.
When you take a closer look at the two, however, it becomes clear that stock market investing is not gambling. It is not based on guesses as it seems to outside observers. Learn more about why the stock market is not gambling. Then, explore how some could potentially use gambling strategies in the stock market and why that is never recommended.
Stocks Aren't Gambling Because You Own Part of the Company
The biggest reason that trading stocks is not gambling comes down to what it means to own a stock. When you own a stock, you are a shareholder, meaning you own a very small fraction of the company. This is important because it means that you can claim a very small portion of the company's profits.
You Have to Gauge Profitability
Because buying a stock means you own part of the company, it is crucial that you understand its future profitability. This is easier said than done, but it is an important distinction. It shows that when trading stocks, you conduct a significant amount of research. By contrast, when you gamble, you leave everything up to chance.
Some of the things that you will consider before buying or selling a stock include:
- Stock charts
- Company metrics
- Fundamental analysis
None of the above would be relevant if you were gambling.
You Can Make More Informed Decisions With Stocks
Think about all of those considerations mentioned above, such as the stock chart, company metrics, and news. These are all sources of information that help you make an educated decision before trading.
Having that type of information available would be useful in gambling as well, but it simply isn't possible. When gambling, your knowledge is typically limited to your immediate observations about the space. For casino games, it is limited to what you see about other players or maybe your ability to count cards. When betting on sports or races, it is limited to your knowledge of the athletes and teams.
Stocks Aren't Gambling Because Stock Values Aren't Random
Another major reason that stocks are not a form of gambling is that the value of a stock is not left to chance. It may seem that way to an outsider because of the long list of variables that influence stock prices, but it is not random. By contrast, the outcome of gambling is random.
Yes, stock prices can be fairly volatile in the short run. But over time, the prices show an accurate value of the company in question.
Gambling Is a Zero-sum Game, While Stock Investing Is Not
When you look at the potential outcomes, another difference between the stock market and gambling becomes clear. Gambling is a zero-sum game. That means that you need a loser and a winner. The loser will lose money, while the winner will win money. This formula applies to every single gambling transaction.
By contrast, the stock market is not so clear-cut. Some people may win or lose completely, as they might with gambling, but this is not the only option. Many people win or lose just partially. This comes from the ability to buy or sell a stock before the price movement is complete.
The other difference that becomes clear when comparing the outcome is that gambling never generates value. Instead, gambling only transfers it. By contrast, stock investing can generate value in the form of company profits and profits for its shareholders.
You Win Or Lose With Gambling, But There Is Gray Area With Stocks
One important takeaway from the above information is that you have to win or lose when you gamble. By contrast, investing offers a gray area.
One example would be if a stock decreases in value, but you earn dividends on it. The dividends you earned mean that it may not be a complete loss.
Stocks Have More Safety Nets Than Gambling
Trading stocks also gives you access to more safety nets than you would get with gambling. You can use these to reduce your potential losses.
The most common example of this is a stop-loss order. This is when you choose a limit, and if the stock's price drops below it, you automatically sell your stock. The strategy is designed to minimize your loss when the price plummets. It essentially lets you decide the maximum you are willing to lose.
There is no similar option for gambling. Instead, if you bet $10 on something and lose, you are out $10. That being said, it is worth noting that some newer online gambling websites have some methods of mitigating risks. For example, they may offer partial cash-outs or in-play bettering. But these are still rare.
Gambling Has A Set Timeline, And Stocks Don't
When you compare the details of gambling and investing in stocks, you will notice that gambling is time-bound. There is a set start and end time for every single bet that you make. As soon as the game is done or the race or sporting event is over, the gambling interaction is done. You know if you won or lost.
By contrast, trading stocks does not come with this type of time limit. In fact, you tend to get more rewards if you hold onto your stocks for longer. A classic example of rewards for holding onto stocks is when you earn dividends. Another example is the fact that you pay a lower capital gains task on stocks you held for over a certain amount of time before selling them. That is the government incentivizing you to keep your stocks.
How Stock Investment Is Similar to Gambling
While we've established that trading stocks is not gambling, you can't ignore the similarities. After all, these similarities are why the comparison exists in the first place.
You Study Behavior Before Decisions
Whether you are gambling or investing in a stock, you will likely study the behavior of others. This is especially true with certain types of gambling, such as poker or blackjack, where you interact with others. In those games, you would try to evaluate the patterns and behaviors of other players to make a decision.
With stocks, you study the behavior of the company as a whole as well as the public perception of it. For example, the rumors and news mentioned above in your decision-making affect whether you choose to invest.
But It Is Much Easier To Get Information For Stocks
But even this similarity has a difference. Notably, it is much easier to get information about stocks, including objective information. You can just look at the company filings to gather data that is outlined in hard facts. By contrast, analyzing the behavior of a poker player is just subjective.
Both Come With A Risk
Whether you invest in stocks or gamble, you will always face a risk. You cannot invest or gamble without an initial investment and the knowledge that you may lose that investment.
But You Have More Resources To Minimize The Risk With Stocks
While both come with a risk, trading stocks gives you access to more resources to minimize the risk. Most notably, you have access to much more information, as mentioned above. Another way to minimize risk is with the safety nets, like stop losses mentioned above.
Be Wary About Gambling Tendencies In Investing
All of the above tells you that investing in the stock market is not gambling. However, there are some ways that you can accidentally incorporate gambling tendencies into your investing. You should be wary of this, as it can hurt your returns.
Keep reading: Can You Sell Stocks on the Weekend? [Answer]
Don't Only Trade To Win
One of the big concerns is if you trade only to win. This means you are taking the approach of gambling, where you can only win or lose. This is an unhealthy mindset, as it can stop you from taking advantage of stop-losses or simply exiting a trade.
Don't Trade For Social Proof Or Excitement
You also don't want to trade just for the excitement you feel or for social proof. Gambling is for excitement; investing should be methodical.
Investing in the stock market is not gambling. You can do more research to make an informed decision about the stock market, and owning stocks gives you partial ownership of a company. By contrast, you own nothing with gambling and have less available information. Investing in the stock market also gives you more ways to mitigate your risk and allows for partial success instead of being all or nothing.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.