The recent ructions involving GameStop and Robinhood have bought the risks of trading on the stock market into sharp focus. And also revived the old question: Is trading in stocks a form of gambling?
This is a topic that stirs up a lot of debate, with one side insisting that trading is a serious profession, and the other dismissing it as a form of respectable gambling.
The GameStop saga, in which traders lost their shirts because they bet the stock would fall only for it to rise, would appear to support the latter point of view.
But despite the myth that trading and gambling are the same, they are two very different things. And if you approach investing in the same way as you would a game of blackjack, you are not going to be very successful.
So why does this myth persist? Because although trading is not the same as gambling, they do share some characteristics, listed below.
Similarities between trading and gambling
The element of risk
There are risks involved in both. In order to gain value from trading or gambling, you have to stake a certain amount of money. It is this risk that investors and gamblers accept that allows them to make gains on their capital.
That is why the trader and the gambler must decide how much risk they are willing and able to accept and act accordingly. In both activities, if you disregard your risk tolerance, you become vulnerable to losing more than you can afford.
Research and strategy
The quickest way to lose your bankroll in gambling is to play games you are unfamiliar with. Not knowing the odds, or the best approach to the game, will cost you, whatever you might have heard about beginner’s luck.
On the other hand, approaching a game like blackjack strategically can significantly reduce the odds against you. Being familiar with the game and the best strategies to play won’t guarantee you a win but will help stretch your bankroll.
This is why using the play for free option available in online casinos is always recommendable before betting for real money when you are trying out a new game or slot.
Good traders also research companies before buying stock. In order to make money investors
must gauge the potential profitability of a company. To do this they need to draw information from a variety of sources including stock charts, company metrics, news, and even rumours.
They must also develop a long-term investment strategy.
This type of research has parallels with sports betting. A good sports bettor will look at such factors as past performance, conditions of play and many other variables before placing a bet. The differentiating factor here between trading and sports betting is time.
Whether you are betting on the outcome of a series of games such as a football championship or tennis tournament, there is a set time and date when the event(s) will be over and you will know if you have won or lost. Stocks and shares can be held indefinitely, giving the investor much more opportunity to turn a profit.
Researching investment opportunities and developing an investment strategy takes time and
hard work. To be done successfully it is basically a full-time job.
Learning and trying out new gambling games, even if you aren’t betting for real money, is
fun. The same can be said of studying the form of a horse, a team or an athlete, as sports bettors do. The rewards might not be as certain, but the process is a lot more enjoyable.
Despite these similarities between the two activities, there are several very important reasons why they should not be equated with each other, which we will look at now.
Why trading stocks is not gambling
A zero-sum game is a term in both economic theory and game theory for a situation where one participant’s losses or gains are exactly matched by the losses or gains of the other participants.
Gambling is a perfect example of a zero-sum game. There is always a winner and a loser.
Gambling merely transfers funds from one to the other, and the loss is total. When you lose a gambling hand, your stake is gone.
In investing, on the other hand, there can, of course be winners and losers, but it is rare for these to be total. Investors buy and sell, which allows them to regain at least part of their capital, even if they sell at a loss. The only chance to recoup some of your losses in gambling is by taking advantage of online casinos cashback offers.
The overall wealth of the economy is increased through investing. Selling shares helps companies raise capital which they then use to increase productivity and develop new products.
In this way, companies earn profits which are shared with investors through dividend payments. Over the long-term, investing generates wealth for the both the investor and the economy as a whole.
Gambling does not create value; it merely redistributes wealth from one party to another.
Nick Youngson CC BY-SA 3.0 Alpha Stock Images
What many people tend to forget in relation to buying stocks is that they represent ownership in the company. Shares give the holder a claim on a small portion of the assets of the company, and a fraction of any future profits generated by the company.
When you put your money down on a roulette table, it does not give you any claim on
the future earnings from that table, more’s the pity.
We should also keep in mind that what happened with GameStop is not an everyday
occurrence on the stockmarket. The traders who lost money did souse of the unforeseeable actions of a group of amateur investors who were more interested in disrupting the market than making a profit.
To put it in gambling terms, it would be like losing a bet on the outcome of a football match because the fans invaded the pitch. Luckily, that can’t happen, but you get the idea.
As you can see, investing is not the same as gambling. If you approach investing as you would gambling, you’re almost guaranteed to lose your shirt. And if you approach gambling as you would investing, not only are there no guarantees you’ll make money, you’re also missing the point; gambling is a form of entertainment, not work.
In the end, trading is a job that, if done correctly, can provide an income for the investor.
Gambling is a hobby and relaxation. And while you will win money gambling, you never
know when or how much, or whether your wins will cover your losses. Which is why you can’t depend on it to pay the rent.
If you want to develop a source of income, you can experiment with trading. If you want an exciting hobby that is occasionally going to reward you with some extra cash, we recommend gambling.