Is the Stock Market Like Gambling?
The stock market has constantly been labeled as a form of gambling ever since it's creation. When a person first gets into investing, they will often hear warnings from their family and friends that it's just like gambling. Usually, when a person says this, it's because they have a limited understanding on how Wall Street works. However, there is a little bit of merit and reasons behind some of their concerns. Millions of people lose money and make money in the stock market every day. It's because of this, that many consider it to be similar to purchasing scratch off lotto tickets at your local convenience store, or rolling the dice at the tables in one of the many casinos in Las Vegas or Reno. But there's a few major differences between the stock market and a scratch off lottery ticket that make it possible to beat the odds when it comes to stocks.
The first thing you should understand, is that the stock market is not like a casino, in that it is not one company that is out to make a profit. The stock market is just a place for different companies to gather, and for people to come and buy or sell shares in those companies. A casino's main objective is to make a profit, and they can't do that unless they are winning most of the time. For them to win majority of the time, somebody has to lose that money. This is the main difference with Wall Street and somewhere like Las Vegas or Atlantic City. When you sell your shares and make a profit with stocks, that doesn't necessarily mean that somebody is on the other end of the table losing their money like when a person is gambling. Let's say you buy 10 shares of Microsoft at $30 per share. So you just spent $300 and bought those shares from someone else (or the company). Then let's say the shares double in value in a few months, and are now worth $60 each. You just doubled your money and made a $300 profit. Now you decide to sell so you can keep that profit while you have it, and you sell them at $60 a share. But then Microsoft's stock shares rise in value again, and are now at $80 a share. Whoever you sold them to for $60 a share, just made a $20 profit on each one (assuming they sell at that price). You made your profit, and they made their profit, and nobody has lost money yet. For all you know, the company's stock price could continue to increase and never decline. So everybody is making money now, including the company. This is the main difference between trading stocks and rolling the dice or playing cards. In order for you to make money at the casino, the casino or someone else at the table has to lose some.
Trading stocks is also fundamentally different than playing the lottery or buying scratch off tickets at your local liquor shop. The main reason I say this, is because when you buy a lotto ticket, the odds are automatically against you, similar to rolling dice in a casino. In order for you to win the lottery, thousands or millions of people have to lose that money. This is how they lottery stays in business, and how they can afford to give away a million dollars to people who only paid $1 for their ticket. It's because they gathered up more than a million people, and had them all pay $1 each. What makes a winning lotto ticket or scratch off ticket so valuable, is the thousands or millions of dollars that were betted against it. All those people buying $1 tickets basically betted against yours and bet that they would win instead. So when you do win, you just beat them all, and your winning ticket is now worth the equivalent of all those bets. The share price of a stock is completely different than this, because nobody is betting against you. What causes the price value of a stock to rise, depends on many different factors that usually revolve around the company's overall worth, such as how much money the company is making or how well the industry for that company is doing at the time.
If a person enters the investment world while viewing the stock market as a form of gambling, then their odds of making money with stocks will be similar to their odds of winning at the craps table. If that same person views it as something that can be learned, and beaten, then their odds of actually beating the market will be much greater. People who are good when it comes to investing, usually do a lot of research before they buy or sell a stock. This means keeping up with a company's financial reports, looking at the overall industry and demand for the company's products, keeping eyes and ears open for positive or negative news about a company, as well as many other factors. If you do your research and spend time studying potential investments, then there's no reason why you shouldn't be able to come out ahead in the end. Sure, you can learn how to play poker and blackjack and be great at it, but the casino is still employing people that they think are better than most people, and they are out to ruin you and profit from your losses. When it comes down to predicting which stocks will rise or fall in value, it takes a lot of research and practice, just like poker or blackjack. But at least when you trade stocks, you know the house usually isn't out to watch you crash and burn so they can profit from it. For this reason, trading stocks is much safer than gambling.
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