How much gambling is there in the stock market game?

There are days when stock market losses are more common than smiles on the faces of investors. So it was in 2008, and so it is now. Both moments raise the issue of the similarity of the stock exchange with gambling. And, while it is very obvious that both players are in dire need of luck and that the amount of passion is often equally intense, the real question is how many essential similarities these two social phenomena have.

Believe it or not, as only a handful of things in the world, it is up to you whether the stock exchange will contain casino impurities or will have very few points of contact.

Luck is desirable but it isn’t the decisive factor

Investing is a rational outlay of money with consideration of risk factors in order to achieve the expected return with the greatest possible certainty. It is precisely the determinant of thinking that is the essential thread that distinguishes investing from gambling because, in casino games, the outcome depends entirely on luck and to no extent (or to a very small extent) on the experience and knowledge of the participants. Of course, the presence of luck is a desirable circumstance when investing in the stock market but it is not the determining factor that contributes to the final result.

What most stock market observers associate with gambling are short-term purchases/sales practiced by almost all market participants. However, even short-term investment cannot be called speculation just because the length of the time horizon is measured in days or weeks. As long as the investor has money he put in on the basis of rational expectations and with a rational belief that he will make a profit, this activity cannot be considered gambling behavior.

And, just as the length of the investment period does not matter, neither the outcome of the stock market or gambling game determines their meaning. Even if you lose money in a rational and common sense investment, you could hardly be ranked among the supporters of gambling games. The same as winning a raffle, lottery, or poker game at any of the Top 10 Neosurf casinos could not be considered a smart investment no matter how big the profit. The only thing that matters is whether you invest money with rational expectations, that is, do you have valid arguments to believe that you will make a return, or not. Even if you invest money in a ‘hot’ share that does not have too good foundations but you have a feeling that the return will be realized, based on your long-term successful purchases, this procedure can rightly be called an investment.

Of course, if it turns out that by following your feelings you rush into losses from share to share, it could be called gambling, regardless of the fact that the same way of behaving for someone else, who has a lot of experience, could be a classic investment.

The stock market is a zero-sum game… it’s misconception

Another misconception is that the stock market is a zero-sum game, which is the main feature of games of chance. In gambling, money is simply redirected from all players to the winner (minus the organizer’s costs), with no new value being created at all. Stock trading increases the overall wealth of the economy: by setting the price of capital, companies compete with each other and improve productivity. Thus, it is practically possible for both the seller and the buyer of the same share to be winners, while in any game of chance, it is impossible for everyone to win. The effects of the zero-sum game on the stock market can, however, be seen but only on the futures and options market.

And, while these days you are dissatisfied with the changes in stock prices in your portfolio and listen to the sermons of others who told you not to “gamble”, the only thing that can calm you down is the feeling that you still keep a lot of things under control as much as it is possible in any other type of investment, which is practically impossible in any game of chance.

This aticle does not necessarily reflect the opinions of the editors or the management of EconoTimes