People tend to fear what they don’t understand. This has been proven true time and time again. An average person knows a lot less about the stock market then they should. There is a sort of mystic tied to stock market investment. Since it is not outwardly clear how stock market investors make their money, people have a lot of assumptions about how it actually works. The biggest prejudice about the stock market game is that it is the same thing as gambling.
There are some similarities between gambling and investment as a concept, which serve as a root for this presumption, but at its core, stock trading has nothing to do with gambling. Inherently, this kind of hearsay causes a lot of people who might have the knack for stock trading to shy away from it. I’m going to attempt and explain the main differences between gambling and stock investment.
Loss risk control
One of the fundamental differences between these two things is what happens when the odds don’t go in your favour. With any sort of gambling, once you put your money down, there are two possible outcomes. You either win and earn a profit, or you lose and your money is gone for good. This is not even remotely true when it comes to stock market investment.
Experienced investors have techniques that they use to avoid 100% loss scenarios. This isn’t really hard to do. You can, for example, sell your stocks as soon as the loss hits a certain percentage. If you see that the price of a stock has dropped 5% since you bought it, you can sell it and retain 95% of your capital.
The time boundary distinction
When you place a bet while gambling, your “investment” has an expiration date on it. This means that once the hand, the match is brought to a finish you have either lost or won. There is no chance that you get some money back or to make a return on in investment in the long run. This cannot be said for stock investment.
In order to get long term payments, investors can spread their investment across multiple dividends and accumulate capital in small returns they get for the risk they are taking by investing their money. As long as you hold on to stocks, you are getting payments. If the team you bet on loses at the beginning of the season, goes on a winning streak later on and end ups winning the championship, you don’t get any of your money back or benefit in any kind of way.
The mentality
If you have gambling tendencies, it is not hard to turn stock market investment into a gambling game, but isn’t this something that can be applied to almost anything. There are investors out there who are hooked to the adrenalin rush of having large sums of money riding on a single investment. This isn’t what stock market investing is about.
Rushing in and purely relying on a “gut feeling” is not a thing that should be brought into relation with stock market investments. People who let their emotions, mental state or social pressure motivate them to play the market are actually putting themselves at risk and are not to be considered good examples of what investors do.
Information transparency
The stock market offers an abundance of information related to each individual stock. The public can actually access a lot of information and statistics related to daily activities of companies and their past activities and statistics. You can use various techniques to compile this data into relevant indicators you would want to use in your decision making process.
You can’t get this kind of statistics when you sit down at a roulette table. You get no information about previous players, the statistics about winning numbers or anything else. All you can hope to get is information is the table “hot” or “cold”. That’s about it.
I could go on, but by now, it seems quite apparent that these two activities are very different from each other. The main reason is that the element of randomness, or pure blind luck, is reduced to a minimum when it comes to stock market investment.