If you were to ask an average person on the street whether the stock market and gambling have anything in common, many of them would probably answer in the affirmative.
While we cannot dispute their point of view, a question arises — is gambling that similar to trading in stocks?
Sure, both activities carry certain amounts of risk, but do they have anything else in common? Is there an element of luck in the stock market, or are investments more calculated in comparison to playing slots, for instance?
You’ll find the answers to these and many more questions in the sections below. Continue reading as we delve into the alluring worlds of gambling and trading.
By definition, gambling implies staking money on an event whose outcome we cannot predict.
So, is it really possible to consider stock market gambling?
As we’ve mentioned, investing and traditional forms of gambling do intersect. Let’s go over the main points of contact between the two.
One of the main similarities between the two is that both investors and gamblers need to look at and study the odds closely to be able to make an informed decision that would lead to an optimal outcome.
The course of action they’ll undertake entirely depends on the activity in question. For instance, poker players will study the behavior of their opponents, hoping they will be able to read their poker faces and come out as winners.
Similarly, investors try to predict stock prices by studying trading patterns through stock charts.
However, compared to casino goers, investors have a slight advantage in the sense that the information they need is right at their fingertips as part of company filings.
Gamblers, on the other hand, need to be more creative and resourceful to gain the upper hand.
Trading in stocks and gambling are inherently risky activities. Both parties need risk capital to get value, which, in turn, gives them the opportunity to earn more than they have staked.
What’s more, they also ought to find a way to minimize that risk while simultaneously maximizing their chances of making a profit.
Gamblers and investors alike must be aware of the amount of risk they can tolerate — in other words, they need to settle on the amount of money they’re willing to lose before they even start staking.
So far we’ve seen that the stock market is indeed comparable to gambling. However, what many don’t realize is that there aren’t enough similarities to consider the two the same.
Below are the main differences between these seemingly overlapping activities.
Winners vs. Losers
Even if you’ve never gambled in your life, you’ve probably heard the saying — “The house never loses.”
In the case of casinos, this is always true, and the house edge is the living proof of that. What’s more, this advantage will increase the longer you play.
On the other hand, the stock market is all about the long game. Keep in mind that this doesn’t signify that gamblers never win big or that investors always have a positive outcome. We just want to say that the two activities are simply different.
The former is a zero-sum activity, which means there has to be a winning and a losing side, whereas with investing, these occurrences are much more nuanced.
Sure, you could lose everything, but since investors buy and sell, they can often mitigate huge losses, while gamblers have to wait for a gambling hand to end to learn the final outcome.
Speaking of losses, investors can always act right away when they start losing money — they can simply get out of a trade. This way, they’ll prevent the total loss of the invested capital.
Most of them rely on setting up the so-called stop losses with their brokers or brokerage firms. Consequently, if the stock price drops, they can sell it to someone else and retain a high percentage of their capital.
Gamblers, in contrast, have their hands tied. Once you spin reels on a slot, that’s it: all you can do is sit patiently and wait for the outcome. If you lose, there’s no way of getting that money back unless you play again and win.
Another integral difference between the stock market and gambling is the time factor.
The time horizons are distinct in the sense that gambling is a time-bound event. Once the round, game, or race is over, you’ll be able to see whether you’ve won or lost right away.
Basically, there is a set time and date with gambling.
However, when it comes to the stock market, you’ll be playing a potentially rewarding waiting game. Many investors get dividends from companies and rewards for purchased shares.
As long as you keep their stock, the company will be paying you money regardless of the fate of your risk capital.
Power of Knowledge
Now, you might be confused with our last point because we’ve already listed it as a similarity. It’s true that both investors and gamblers rely on strategies and past activities to improve their chances of winning.
Still, while this information can prove to be invaluable in both realms, its availability is where the two diverge.
Data on stock and companies are practically public knowledge. Financial ratios, earnings, and analyst reports can all be easily accessed before investors decide to commit capital. However, gamblers are at a disadvantage here.
Yes, they can rely on various strategies, but once they sit at a table, they’ll have no knowledge of what happened an hour ago or at a different table. They’ll need to work with what they already know.
As you can see, equating gambling to the stock market is a bit of a stretch. While both require certain amounts of risk and strategizing, these are pretty much the only two similarities you’ll find.
Gambling is not the same as investing — the two activities are different, and each of them has its own merits.
One thing both investors and gamblers can hope for, though, is that the odds are always in their favor.