Is Stock Market Gambling - Find out the Real Truth

The stock market is a volatile place, especially in the short run, still 17% of Indian households invest in it and the government promotes the general public to invest more. However, the majority of people lose money in it because of several reasons such as greed, emotional buys, lack of patience, misreading the market and many more.

This inconsistency in returns for the majority of the investors instills a feeling among the general public that investing or trading in the stock market is a risky affair and is equivalent to gambling. But is that really that case, let’s find out:

 

 

What is Investing and Trading?

Now as we know the importance of stock market to a country’s economic health, we must correlate gambling to stock market to ascertain that is stock market really gambling as both have a level of uncertainty attached to it. However, to find the real answer we’ll have to dig deeper and understand what trading and investing is:

Investing or trading constitutes the allocation of capital or funds to an asset such as stocks, bonds, or other securities for the purpose of generating income or making a profit. The fundamental idea behind any investment is the expectation of return; an investment is expected either to yield returns in the form of income (such as dividends or interest) or an increase in value over time.

Risk and return are, therefore, a function of investing. Normally, the greater the return potential, the greater the risk, and conversely, the lower the risk, the lower the potential for returns.

For instance, stock market trading refers to the buying and selling of shares, often referred to as stocks or equities of companies listed on public financial markets. Such trades usually take place in a stock exchange, such as the Bombay Stock Exchange, or National Stock Exchange.

The bidders and sellers here are individual and institutional investors who acquire securities; prices remain subjective to the forces of supply and demand as determined in the market.

Participants either in trading or investing have to evaluate how much of their money they are willing to put at risk. A trader, for instance, typically risks only 2% to 5% of their total capital per particular trade. Long-term investors, however, are often advised to diversify their investments over a range of asset classes to minimize risk.

But within any asset class, for example, equities or stocks, the level of risk and expected returns vary considerably. This is particularly true of large, diversified markets, where a wide range of stocks may have very different risk profiles as well as potential return.

 

 

What is Gambling?

Gambling is the process of staking money about uncertainties. Just like investors, gamers must regulate their risk through factors such as potential winnings and likelihood of winning.

Professional gamblers employ certain strategies that determine the outcomes of their gambles. Analyzing past performance would form part of this strategy, as would looking for patterns in people's behavior. Calculations of odds would also be included. In casino games, gaming against the house is predominant, while in sports betting and lotteries, gaming is between people offering different money on each outcome.

 

 

Factors differentiating Stock Market from Gambling

Long-term favorable odds: Stock market investments done for a longer duration are considered to be much safer bets if it's well diversified. On the other hand, in gambling, the house generally enjoys a mathematical edge over the gambler which only increases as the duration increases.

Although it doesn’t mean that a gambler cannot ever win a jackpot or an investor eventually will make handsome returns over a longer period of time, it’s just that when it comes to a longer horizon of time period, the odds are stacked in favor of an investor.

Loss Minimization: Another key difference between gambling and leveraging the stock market is the scope of loss minimization. In gambling, generally if you lose the bet more often than not you end up losing all your capital.

On the other hand, in stock market trading a trader can mitigate their losses using different options. On such option at his disposal in stop loss. A stop-loss order is an order used for risk management. It allows you to raise a sell order for a stock if the price falls below a certain level that you've set.

Suppose you purchase a stock at Rs.100; you can set a stop-loss at say Rs. 90. If the price of the stock reaches $90 or lower, your order will trigger a sale automatically, thereby limiting your potential for loss. If you place a stop-loss, then you are determining the price floor of your investment and can help protect it against more massive losses.

Time Horizon: Gambling lasts for a limited period of time which is generally for a short duration. Once a game, a race or a hand gets over and with it your chance to win also gets over.

By this time, you have either won or lost everything, whereas investment could last for years which gives you the opportunity to make the most of your investments or a chance to correct your mistakes. Also, if you are a long-term investor, you lower your risk of incurring losses and get other benefits such as dividends and bonus shares.

Availability of trusted public information: Analyzing past information and data is important in order to make future calls both in the stock market and gambling. It allows you study the historical patterns or behaviors of stocks and your opponents to make winning calls ahead.

Information about stocks and companies is readily available to the public. Some of this information includes financial reports, ratios, and details about management teams. Investors can analyze this information directly or rely on research reports from analysts. For active traders who make numerous trades daily, the day's market activity provides valuable insights that can inform future trading decisions.

 

 

Factors to consider before entering stock market

 

Understand the downsides of stock market

Starting your stock market journey is one of the best decisions you could take for your financial freedom, but it is always a wise decision to identify and assess the risks associated with the stock market. It is always advisable to weigh up the risk of losing money in the stock market and enter the market only if you have the appetite to incur losses.

 

Learn stock market before entering

As they say, "failing to practice is practice to fail", similarly in stock market also if you enter without having any prior knowledge of how the stock market works, then there are higher chances of you losing money. It is important to understand the basics of how the stock market works and learn the strategies of investing and trading in order to succeed in the stock market. Check out the stock market courses from basic to advanced and learn the nuances of succeeding in the stock market.

 

Avoid emotional buying or selling

Humans are emotional beings, and they tend to sway in emotions and make buy and sell calls on the basis of their emotions which could be detrimental to their portfolio. In the stock market, it is always advisable to make investment and trading decisions on the basis of historical charts and trends and future strategies rather than emotional buying.

 

 

Final Thoughts

Investing and gambling both have the risk of a possible loss but totally differ when it comes to odds. While investing offers an almost fair chance at profit or loss, gambling favors the house by default.

In spite of having a lucky win, the urge to gamble it all away for further gain may be insatiably tempting. While investing is often an ownership in stocks or bonds with more real and possibly long-term benefits