Is Investing in the Stock Market Gambling?

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Is investing in stocks gambling? It’s not unusual to hear people say that the stock market is similar to a casino when investors try to earn a quick profit or assume an unhealthy risk level.

Conversely, publicly-traded stocks and funds are the primary holdings in most retirement accounts. Many households have utilized the stock market to afford retirement and earn passive income to improve their finances.

However, there are some situations when investing in stocks is gambling. Here’s how to make sure you don’t treat your stock investments like a roll of the dice.

Is Investing in Stocks Gambling?

Investing in the stock market isn’t gambling when done correctly. You must make sure to avoid unnecessary risk or harm to others.

Here’s how Dictionary.com defines gambling:

  • “The activity or practice of playing at a game of chance for money or other stakes.”
  • “The act or practice of risking the loss of something important by taking a chance or acting recklessly.”

What individuals perceive as investing can actually be gambling or speculation when they use more money than they should for a particular trade or company.

Alternately, if you treat the stock market like a casino by not researching investments, you are essentially gambling.

Ultimately, whether or not you buy shares of a particular investment vehicle depends on your goals and personal conscience. To invest instead of gamble, you should strive to pay a fair price and avoid excessive risks. 

Can Ethics Highlight the Difference Between Investing and Gambling?

When is investing in stocks gambling? If you’re still confused about the difference between investing and gambling, you can measure potential investments ethically.

You may consider investing to be legit and ethical when you’re buying or selling at a fair price, a reasonable risk level and realistic potential returns. 

While it’s not immoral to earn a profit, investment ethics maintain a fair market for buyers and sellers so that both parties have more opportunities to build wealth.

Two tests can help you determine if an investment is ethical and, consequently, not gambling.

Just Price Theory

Supported by notable philosophers Aristotle and Thomas Aquinas, this encourages the buyer or seller to only trade assets at a fair market value. An item’s cost and risk should be considered to avoid exploitation.

If an investment is risky or exploitative, it likely falls more on the side of gambling.

Greater Fool Theory

Similar to “get rich quick schemes,” speculators rely solely on market timing and momentum instead of fundamentals to earn a profit. In this situation, buyers pay more than the item’s intrinsic value as they expect to sell for more. 

The unrealistic demand creates a bubble, and the last buyer will most likely lose a lot of money. However, you don’t know when it will pop, and you may lose most or all of your original investment. This makes it more of a gamble.

Why Investing in Stocks is Not Gambling

All investments carry some risk, including short-term investment ideas that you can quickly exit. However, investing in stocks is typically not considered gambling for the following reasons.

Stock is Ownership

When you buy stock, you purchase ownership in a company. This differs from gambling because you don’t gain ownership of anything once you put your money on the table at a casino.

As a shareholder, you can vote on proposals presented during the annual shareholders’ meeting. These proposals include choosing candidates for the board of directors. 

Other ballot measures can help shape the company’s business practices. For example, a recent trend is whether or not to divest environmentally unfriendly operations.

While owning stock doesn’t let you influence day-to-day business decisions, the weight of your vote on shareholder proposals expands as you own more shares.

Holding more shares means you can also receive more profit through dividend income. These disbursements can require holding your shares for an extended time period to qualify. 

In contrast, short-term traders only make money from rising share prices in the near term. As a result, you’re not relying on the company to have sustainable long-term growth, which stock ownership requires to earn a profit.

A Company’s Value Impacts Its Stock Price

With gambling, an asset’s price is driven up artificially because speculators are trying to make a quick buck. The share price value can quickly become worth more than the company is worth, and new investors assume more risk.

The Wall Street Bets movement is an excellent example of stock market gambling as speculators coordinate buying shares of specific companies. Many made money by being the first to buy shares. 

But, if you didn’t sell at the right time or bought at the top, you most likely lost money.

Sound investing allows share prices of well-managed companies to flourish naturally. Businesses that don’t provide value to the economy will see their share prices decrease accordingly.

One example is two competing computer chip manufacturers. The company with the better product and more sales will likely have a better share price performance than the one with an inferior product or major recalls.

It’s common to buy shares of promising companies but exit your position when market conditions change several years later. This makes your investments much less of a gamble.

Motley Fool Stock Advisor presents stock ideas for companies that may outperform the stock market over the next three to five years. This stock-picking service analyzes a company’s fundamentals instead of purely relying on technical data.

Ways Investing is Different from Gambling

The stock market can be used for investing or gambling. But when is investing in stocks gambling? This either-or situation applies to most things in life because a product can be used for good or bad.

You’ll notice these critical differences if you are using the stock market for investing instead of gambling.

Perceived Risks and Zero-Sum Game

Unlike gambling, the stock market isn’t a zero-sum game where one side needs to lose money so another can make money.

A healthy investment climate allows everybody to earn wealth. Yes, some assets will perform better than others and some investments lose money. This just emphasizes that it’s critical to estimate the perceived risks of potential investments.

Here are some risk factors you can evaluate in order to make an educated investment decision.

Business Strategy

Is the company’s business model a good fit for your personal strategy? Also, is it competitive with its industry and the broad market?

Financial Risk

Does the company have a healthy balance sheet? If not, can it become profitable under current market conditions?

Potential Returns

Stocks with higher return potentials tend to be riskier and have volatile share prices. Small-cap tech stocks can be riskier than blue-chip dividend stocks, but the potential gains might be higher. 

Recent Share Price History

Previous price performance doesn’t guarantee future results, but it’s worth evaluating a stock’s price history. If there has been a sudden price change, find out why and determine if the real risk is too high. 

Reading analyst reports and company financial disclosures is also helpful. 

Limit Losses Through Risk Mitigation

Effective risk management is a core requirement for becoming a successful investor. You don’t have to micromanage your portfolio by logging into your brokerage account several times a day, but you should have a plan to avoid investment losses.

Fortunately, unlike gambling, there are ways to mitigate your investment risk. Portfolio analysis tools make tracking your portfolio performance and assessing your personal investment risk easier. 

In addition, there are several ways to achieve a balanced asset allocation.

Avoid High-Risk Investments

You should try not to invest in stocks that are too volatile for your risk tolerance. Furthermore, you should move to less-risky assets as you approach retirement.

Diversification

Having exposure to multiple sectors provides a diversified portfolio that minimizes your downside risk. You may also buy index funds to invest in hundreds (or thousand) of companies with a small amount of money.

Position Sizing

A common practice is to allow a maximum 5% allocation for a single stock in your portfolio. You may also go as low as 1% for volatile stocks or when you want to invest in more companies.

Rebalancing

An annual or semi-annual portfolio review can ensure your portfolio allocation aligns with your target position sizes. You can also decide to sell stocks and funds that are no longer a good match for your strategy.

Stop Losses

You may exercise a hard stop loss to sell your shares when a stock price closes below a specific amount or drops by a predetermined percentage. This practice may require selling at a loss, but you can avoid losing more money by holding too long. 

Time Horizons

A classic investment mantra is “time in the market is better than timing the market.” Bull and bear markets are cyclical, and having an investment plan for different time horizons is not a bad idea.

Time horizons include:

  • Short-term: Five years or less
  • Intermediate: Five to 10 years
  • Long-term: Longer than 10 years

You may hold different investments for various time periods and sell them as your risk tolerance decreases or when you accomplish a predetermined goal.

One possibility for your long-term portfolio’s core purpose is to live off dividends. You have time to weather the ups and downs, but your payout amount increases as you buy shares through bull and bear markets.

Investing during a recession may only require a short time horizon as the average duration is only 17 months, according to the National Bureau of Economic Research (NBER).

Access to Information

Understanding how a potential company works and its potential risks helps you make informed investment decisions. Gambling doesn’t offer you the ability to make educated decisions.

Instead of buying a stock mentioned for several minutes on CNBC because a recent event is making market headlines, you can find credible long-term ideas through stock newsletters.

Many services can cater to your investment strategy, and you can follow along with a model portfolio. Multiple investment research services may provide detailed writeups about companies from multiple industries, although some focus on a certain sector.

You can also use your brokerage’s research tools to research a specific company. At a minimum, you will see a stock price chart, recent company-related news and financial data. Several brokers offer in-depth research tools and investment simulators.

Not adequately researching investments can increase your risk since you may be investing on emotions or fall prey to investment scams.

Is Day Trading Gambling?

Day trading is similar to gambling since you rely on short-term momentum to earn a profit. Therefore, it can easily become a vice if you don’t correctly manage risk or research potential trades.

Additionally, like gamblers, most day traders lose money overall.

Whether you plan on selling your shares the same day or within a few days, technical analysis is needed to be a successful trader. Using a service like TradingView lets you overlay indicators and look for trends to determine your entry and exit points.

Before investing real money into short-term trades, consider using a paper trading app to see which technical indicators help. You can also decide if this practice is too risky for your appetite.

Is Options Trading Gambling?

Options trading shares elements with gambling since you take a side and lose money if you’re wrong. Call options can make money when the stock price rises. Similar to shorting a stock, put options require the stock price to decrease to make money.

For many investors, the risks of trading options are not worth the potential rewards because some studies show that 90% of retail options traders lose money. Several other factors can help determine if options are investing or gambling.

Complexity

There are basic and advanced options trading strategies. It can be easy for inexperienced investors to pursue strategies beyond their skill level.

Leverage

A margin trading account is required to sell options but not to buy them. You must pay interest charges on leveraged trades, which is an extra expense.

Liquidity

Thinly-traded stocks without much volume can be more volatile. You may decide only to trade options for stocks with ample liquidity.

Time Horizon

Most options trades expire within one to 90 days from the purchase date. Your trade expires worthless if the share price doesn’t meet or exceed the strike price by the deadline. You lose your entire initial investment if this happens.

Time Decay

The total return potential decreases as the expiration date approaches. As a result, you may need to close a position early to secure profits since waiting too long can mean you will barely break even or even lose money. 

Summary

Is investing in stocks gambling? The answer is no However, assuming too much risk or investing more money than you can afford to lose turns the stock market into a casino.

Before using any of the best investing apps to build wealth, investors need to take steps to manage risk by building a diversified portfolio, routine rebalancing and researching new stocks they want to buy.

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