A lot of people feel that investing in the stock market is gambling. I would argue that while some types of investment in the stock market is certainly gambling, depending on the systems you use to place your investment, investing in the stock market may not be gambling.
I fully realize that this statement sounds exactly like something a gambler would say in order to justify their gambling habit (and to be entirely honest, I phrased it that way to draw parody for a little fun). Hopefully by the end of this short article I can convince you that investing in the stock market is not gambling.
Let’s start with types of investment that are closer to gambling. To do this, let’s look at what gambling is: playing the odds to try to win more money at the risk of losing all or some of your money. Based on this definition, I believe that investing in companies with no predictability is gambling ( such as mining companies that are yet to make a profit; companies with no financial history or undertaking new endeavors; and I realize this is going to be contentious and unpopular, but I would say investing in companies purely on TA and without looking at their finances or researching them properly). For me, this type of investing is gambling because you’re playing the odds.
For me, investing based on calculated Return On Investment (ROI) is not gambling (accepting that there’s an element of risk in all things). In other words, if you invest in a company that is valued at a multiple of it’s profits or future profits that you find to be an acceptable ROI and you’ve sufficiently researched the company, then this isn’t gambling. The resultant ROI might be via dividend or increased Market Capitalization (MC), providing the justification for the increased MC lies in it’s underlying ability to generate money at a rate that represents an ROI that is favorable for another sensible investor.
When we consider a calculated ROI and well researched company, investing is no different from a slightly riskier term deposit bank account “investment“. Finally, I would leave you with the idea that an investor who buys into a company based on an expected return will not feel bad if the share price falls from the price they purchased at (with the exception of a black swan event) as they will still be on target to get a return they are happy with (they just won’t get the best return that they could have).
Addendum: As with all investing, I recommend sufficient diversification to cover drops, in accordance with your own financial models / plans.
Also, I recognize that while an investor may not mind the price of their held stocks falling, this does increase the risk of financial loss if something happens which requires the investor to exit that stock (such as unacceptable performance or a black swan event).
