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Learning to Play in the Stock Market Arena
Is the stock market really just a casino?
By Saif Qureshi, Senior Online Editor
Many have heard people claim that investing in the stock market is like gambling in a casino. While there’s some truth to that, overall, investing has been proven the more lucrative choice.
However, there are many successful gamblers just as there are many successful professional investors. So one has to wonder: is it all really just luck? Let’s compare.
Firstly, whether you are investing or gambling, you have to compare the risk of your money towards the possible gain. Investors can lower their risk by following risk management strategies such as diversification or by investing in stocks with strong histories and low measures of beta.
Gamblers on the other hand can look at the odds and decide whether or not it is a worthwhile risk, or how much to put into play. Most professional gamblers, like investors, have a pretty good idea after a while on how to increase their reward, while minimizing risk.
Another surprising similarity is that both investors and gamblers study past behaviour. For example, players playing
poker look at their opponents for clues and try to determine whether or not they are bluffing. They also study the betting patterns of their opponents, and some good players can remember what their opponents wagered 20 hands back. Understanding this information, allows gamblers to predict the future to some extent.
On the other hand, investors try to predict the future by examining and analyzing stock charts using various techniques called technical analysis. However, this is not an exact science either because of the efficient-markets theory, which claims that the current stock price reflects all past prices. This is because there are millions of investors out there looking to exploit the same opportunities as you, and thus it is most likely that the current price already reflects all past events.
So if, both stocks and casinos have risk and both rely on past uncertain information to predict the future, then what’s the point of putting your money in either of them? The case for buying stocks in a company is that it gives the investor an ownership stake in that firm and allows the investor to take a share out of the company’s earnings.
[pullquote] Investors can lower their risk by following risk management strategies such as diversification or by investing in stocks with strong histories and low measures of beta.[/pullquote]Over the long term, it has been proven that business profits increase more often than not, and if profits go up, so does the stock price. That is one of the main reasons why investing is so much safer than going to your local casino.
In the long run, gambling is a zero-sum game, meaning that it only transfers money from the loser to the winner (and of course the house who takes it share). Investing on the other hand enhances the economy, and in the long run more capital leads to improved productivity and wealth for everyone.
You might also have noticed that when you gamble, after the game you are playing is over and you have lost, you lose all the money you put in and there is nothing you can do about this. This example demonstrates the two major ways in which investing differs from gambling.
First, investing is not a time bound event, meaning that you are free to invest for however long you want. However, when you are gambling, you don’t have a choice because once the game is over, the bet is finished and the money is distributed. The second major difference is that when you are investing, you don’t usually lose all your money. The reason for this is that first of all the company you have invested in would have to go bankrupt for you to lose all your money, and this rarely happens. On the other hand, this is very common in gambling because if you lose the game, then you lose your entire bet.
Next time someone mentions to you that gambling and investing are the same, you can inform them about how there are both major similarities and differences. Both involve risking your money and hoping to get high returns, but in the long run investing in stocks has a higher chance of making you a millionaire than playing at a casino.
By Saif Qureshi, Senior Online Editor
Arbitrage Magazine
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