We’ve all at some point in our lives heard someone around us say that stock market trading is like gambling. But is that really true? Is trading in the stock market gambling? Or is it just a myth? If you’re looking for these answers then you’re at the right place.
There is a very common myth out there that the stock market is just like gambling. People believe that traders and investors are nothing more than speculators playing a game of luck. But the simple answer to all of the above questions is – No, investing in stocks is not gambling! And beginner investors should not think of it that way either.
Well then, what are the differences between investing and gambling you ask? The answer is, everything!
People have equated the stock market to gambling for many years and they have their misconceptions and wrong understandings which are just not true. Even though trading and investing have a few similar characteristics to gambling, they are highly distinct.
Investing is a game of taking well-thought-out and calculated risks with your money to grow it. When done in a strategic way over a long period of time, this can bring excellent returns with the power of compounding.
On the other hand, gambling is a zero-sum game that does not produce any extra value for its participants. There is no middle ground with gambling. If you lose, you lose it all to the casino.
You can build wealth in the stock market over a period of time by researching stocks, analyzing the value of a company, and investing in its future prospects. You can also limit your losses by deploying strategies like risk management.
Gambling does not give you such opportunities for decision-making. So in short, the stock market is not gambling. And we will take a deeper look below at all the reasons in this article.
Is Trading Stocks Gambling?
Stock trading is nothing like gambling because there are certain rules that if followed can bring you much better returns than keeping that money in the form of cash or in a savings account.
People who treat trading like gambling without following these rules tend to make much lesser returns or in worse cases, lose it all. This makes them lose faith in the whole concept of the stock market and then they start calling it gambling.
Many people treat trading and investing as a get-rich-quick scheme, always looking for the quick gains and ultra-fast trades. This is the wrong way to approach the market. It is all about making those consistent returns, even if they are small, over a longer period of time.
People lose money in the stock market because they jump into it without the right knowledge or analytical skills. If you treat trading like gambling, so will it be.
The chances of profits are higher than losses in investing when you approach it with the right knowledge and analysis. This is completely opposite in the case of gambling where the probability of losses is higher than profits in the long run.
While selecting a stock there are many fundamentals that you can base your decision on like –
- How old is the company?
- What kind of annual returns has it given in the past?
- How much market share does it hold in its sector?
- How much is the company worth?
- What is the valuation of the company compared to its competitors?
- What sort of returns can you expect on investment?
- And more…
Using this kind of analysis makes it easier and more probable to avoid failure and make rational investment decisions. This provides you with an opportunity to grow your money in a systematic way through compounding returns.
Gambling on the other hand doesn’t provide you with a choice of a better card table that can perform better than the others. There is no option of compounding your gains in a systematic way over a period of time.
It is just a plain and simple numbers game where the odds are always heavily in the favor of the house.
When a company does well so do its shareholders. There is no concept like that in the case of gambling. A lot of people can win in the share market when given enough time, whereas only one person or a handful of people win in the case of gambling.
This false comparison of investing with gambling causes many people to stay away from investing, without ever realizing the wonderful opportunities that the stock market presents.
To understand the differences further, let’s take a deeper look at what it actually means to buy stocks.
Why Is Trading in the Stock Market Not Gambling
There are a number of important reasons why investing in stocks is different from gambling. Let’s talk about a few of those differentiating factors below –
1. Stocks Give You Ownership
People need to understand that when you buy stocks of a certain company, you’re actually buying part ownership in that company. It may be a very tiny share but it still makes you a shareholder of that company.
This gives you a claim to a share of the profits of the company, the assets owned by the company, and also a vote on how the company is run by its board. More often than not, investors forget the fact that they are part owners of the company and instead treat it as simple trading of stocks.
The more shares that you buy of a company, the larger the ownership that you’ll have. And with it, a share of the company’s profits. Investors tend to look at it as just simple stock trading, whereas in reality, it is far more than just that. It is in fact, exchanging ownership in different companies.
2. Stock Prices Are Driven by the Value of a Company
The value of the stock of a company can fluctuate higher or lower in the short term after you buy them. There are a lot of variables that determine the price of a stock.
This short-term movement might seem random and there is a theory based on it too called the random walk theory.
But over a longer time frame, this value is reflected in the amount of profits that the company is able to generate. A company can be listed in the stock market even without being profitable. And people invest in such companies because investors believe that they will produce good earnings in the future.
This outlook of the present and future value of a company is what moves the price of its stocks. It is a constant fight between bulls and bears.
This is why businesses who project positive numbers see their stock prices go up whereas the opposite is true for companies that have negative revenue projections.
This assessment of a company’s future prospects is complex. Some investors do this analysis on their own. While others outsource it to fund management companies or just invest in things like mutual funds.
Gambling, on the other hand, is a zero-sum game. It simply takes money from one hand and gives it to another (the casino in most cases). It does not create any value (more explanation on this below).
Similarities Between Stock Trading/Investing and Gambling
1. Element of Risk
Let’s face it, both trading and gambling involve risk. You have to deploy a certain amount of capital to be able to gain profits in both a casino and the stock market.
This risk is what you get paid for, unlike a job that requires physical labor (like farming). Having the capacity to be able to potentially lose some or all of your capital is what you’re rewarded for.
Both investors and gamblers should know how much risk they are willing to take according to their risk tolerance. Not knowing when to stop gambling or sell a losing trade can lead to disaster.
2. Study of Behavior
Gamblers and traders both study the behavior and odds to try and find themselves an edge over their opponents and the market. Especially people gambling in games like poker and blackjack, where they try to look for patterns and mannerisms of their opponents to gain an advantage over them.
Similarly, traders and investors analyze things like chart patterns, past performance data, etc. to try and predict future movements in stock prices.
The information of any listed company is readily available through company filings with the US Securities And Exchange Commission’s (SEC) Edgar Database. This gives them access to vital information for decision-making like total debt, owned assets, etc.
These types of pattern and behavior analyses make traders and gamblers to try and find themselves a certain upper hand in their trading strategy and betting respectively.
Differences Between Stock Trading/Investing and Gambling
Now that we’ve had a look at the similarities, let’s get to the differences between the two.
1. Limits to Losses in Investing
Traders can generally limit the amount of losses in a trade if it goes against them and they start losing money. They can apply what is known as a stop-loss order with their stock broker or online brokerage.
What this does is, if the value of a stock goes below a certain pre-defined level, the trade is closed automatically and the loss is booked.
For example, you buy a stock for $100 and place a stop-loss order at $90. If in case the value of the stock suddenly drops to $90 after buying, the broker will sell the stock at $90 and book a small loss of $10.
Similarly, you can also specify a profit target, which once achieved on the upside can be locked in and exited automatically without you having to do so manually.
This is what I generally follow with my own trades. Keeping a risk-to-reward ratio of 1:1, I look for either a profit target of 10% of my investment value or book losses once it goes down by 10%. The stop-loss order is placed immediately after I buy the stocks. This way I still get to retain 90% of the capital deployed for that trade in the worst-case scenario.
This is certainly not the case with gambling, where if you lose, you lose it all. There is no way to minimize your loss amount.
2. Zero-Sum Game
As discussed above, investing can have varying levels of winners and losers, depending on factors like patience, risk appetite, and the duration of investments. Many people holding the same stock can emerge as winners when the value of that stock rises.
Gambling is completely different from that. It is a zero-sum game where the money is taken from the loser and the same money is given out to a winner. No value is ever created in this process.
Investing in the right stocks can build wealth over time for its holders. Companies strive to do better and create better products and services so that everyone benefits from it – the company, the shareholders, the economy, everyone!
This is far from the case with the zero-sum game that is gambling. It is quite truly an all-or-nothing setup.
3. Time Horizons
There is another huge difference between investing and gambling. And it is called time horizons. Let me explain –
In gambling, you have a limited time till when you’re allowed to participate. Once the dealer is done dealing the hand, you can’t enter that round. And within a set time period, you either win or lose the money.
Compared to that, certain types of trading (like intraday trading) can also have a limited time frame to finish executing your trades. But in most cases when investing, you can hold your trades or stocks for as long as you want. There isn’t any time limit as such.
On top of this, certain companies pay dividends to their investors when they hold stocks for a long time. Even if the value of the stock goes down, the net losses are reduced by the dividend amount. There are no such opportunities with gambling.
4. Information Availability
When gambling, people have very limited information available to them. The most you can get is probably a few whispers from around the table about how hot or cold it is. A few signals that you can pick up while observing the table. But that’s pretty much all the info that you can gather.
With investing it’s quite the opposite. You have a plethora of information at your disposal about any company that you might want to invest in. And this information is made available in various forms to us like –
- Various finance news channels like TV, newspapers, magazines, and apps
- Company filings
- Annual reports
- Online forums and investment websites
- Stock market experts on Youtube
- and many more…
Keeping all these factors in mind, you can see how gambling and the stock market are so different.
1. Is Day Trading Gambling?
Although a lot of people consider intraday trading to be a form of gambling, owing to certain levels of similar characteristics, they are both completely different. Day trading entails a lot of careful planning and technical analysis to predict the future movement of stocks. Gambling provides no such possibilities.
2. Is Forex Trading Gambling?
Because of the uncertain nature of the forex (foreign exchange) market, it does have a few similarities to gambling. But calling them the same would be very wrong. Owing to the volatile nature of forex trading, it is really difficult to predict the movement of a currency pair with absolute certainty.
In gambling, the odds are always stacked in favor of the house and against you (unless there is any foul play involved). The chances of you winning are always lower.
Forex traders, on the other hand, rely on their trading strategies and analysis to try and turn the odds in their favor. This is what makes forex trading completely different from spinning a slot machine.
3. Is Options Trading Gambling?
Options provide investors with a means to hedge their investments to protect against any sudden market moves against them. It works like insurance for their investments.
When used in such ways, it can be a very valuable tool for investors to manage their risks. But if used incorrectly and without a trading plan, they can prove to be extremely dangerous and even lead to some major losses.
The good thing about options is that you need very little investment to do options trading and when you’re right, there is virtually no limit to how much you can earn with it. But on the flip side, it can also wipe out your capital without proper risk management. And like the above cases, options traders also deploy various trading strategies to try and come out profitable in the long run.
Options trading is definitely riskier than other forms of trading and investing, with certain similar traits to gambling. But it is still not the same as gambling.
4. Is the Stock Market Considered Gambling in Islam?
There is a common misconception among Muslims that buying and selling of shares in the traditional stock market is the same as gambling and therefore, prohibited by Islam. This is simply not true!
What it says although is that the companies whose shares you trade in should be in compliance with the Shariah law. So companies that are involved in products like alcohol, tobacco, pork, gambling, betting, music, movies, and several others cannot be invested in by Muslims.
5. Is the Stock Market Considered Gambling in the Bible?
The Bible speaks of placing trust in the Lord rather than on wealth in several places. It also gives us insights against the “get-rich-quick” mentality. We can see this clearly mentioned in Proverbs 28:20 which says, “A faithful man will be richly blessed, but one eager to get rich will not go unpunished.”
So investments that require long-term planning should be completely fine but anything that resembles characteristics of gambling, like day trading and options trading, should be avoided.
Investing and gambling have been equated by people for years even though they are completely different. Even with their slight similarities, they have their own unique place in society.
Investing is one of the best-known ways to grow your money over time while gambling is a pure game of luck.
Investing in the stock market involves buying and selling of shares in companies that you believe in with a systematic approach based on analysis and trust.
Gambling, on the other hand, is based on no prior knowledge of what your odds are. It doesn’t have any system for preventing any part of your losses with risk management.
The stock market can have multiple winners which means that there can be many parties that benefit at the same time. Gambling is a zero-sum game that requires someone to lose for someone else to win.
So to sum it up, the risk is always greater than the reward in gambling while the reward is always greater than the risk in trading and investing.
And for all these reasons, stock market trading is not gambling.
What do you think? Is trading the same as gambling? Or do you hold a completely different opinion? Let me know in the comments below, I’d love to hear what you have to say!