Is Investing In Stocks Gambling?
October 1, 2009 by Tisa Silver
Filed under Finance
Is investing in the stock market a form of legalized gambling?
I have heard several references linking the stock market with gambling. Some of the most common ones being “bankers are like bookies” and ”Wall Street is a giant casino.”
Photo by The bright lights, courtesy of flickr
There are definitely some similarities between investing in the stock market and gambling. A couple of the obvious ones being the assumption of risk and the potential for reward.
I think investing in stocks should not be called gambling even though some people may approach their investments from a gambler’s perspective.
When you invest in stock, you take an ownership stake in a company. You can plan how long your investment will last, and any gains or losses won’t be realized until you decide to sell your stock. Your stake may cause you to share in the company’s profits and losses, like an owner is supposed to.
When you gamble, you don’t own anything you just buy a chance. You can’t really plan for anything because your wager ends with the arrival of an outcome for whatever you bet on. Your profit or loss is based upon that outcome and the impact is instant.
Even though the stock market’s movements, especially over the past couple of years, have been influenced by some people’s gambling ways, investing and gambling are not the same.
Only when you take your broker’s advice (just kidding).
Most people spend more time researching the purchase of a new TV than a stock purchase…. and therein lies the problem. Many people are gambling that whatever tip they get from a friend or off of TB will turn out to be a 4-bagger or a 10-bagger, and 9 times out of 10 they lose money. Long-term the overall stock market has averaged 8 – 12% returns a year, and a diversified portfolio should come close to matching that. The current ten year period is a statistical outlier, a bronze decade instead of a gold or silver decade, and they happen once in a while.
Generally, people do invest in the stock market like its gambling. They purchase and sell a specific stock hoping to make money off of it. The tip for these types of investors is to buy the stock and sell it at the right time—which is tough to do. My advice to investors is to diversify their portfolios by adding more asset classes to it. Think about it this way, if you can purchase a cup of Starbucks coffee or a McDonald cheeseburger anywhere in the world, it appears that the market has become more global, which means that you need to think that way. Be sure to incorporate the traditional asset allocations in your portfolio (government and corporate bonds, money markets, large and mid cap stocks, etc.) But, also consider investing in global real estate, global commodities and currencies. By diversifying your portfolio adding more non-traditional investments,you lower your risk and increase your chances for positive returns.