Investing in the Stock Market: Is it like Gambling?

Is playing the stock market gambling?

This is an age-old question, but it requires more than a simply Yes/No answer, I think, because it depends.

If you throw your money without doing any research or thinking, or you do not have a plan, then it IS just like gambling--only worse. At least when you go to the Casinos or bet on football games, you know the odds of winning vs. losing and the potential risk-reward payout.

Investing is definitely risky. So from that perspective, you are gambling.

However, somebody who does NOTHING is also gambling. That person is predicting that he or she will be better for NOT investing.

Who is right? Nobody TRULY knows until the future is no longer the future. Therefore, we're all gambling.

However, we can somewhat calculate our risk, formally or informally.

If you've done your homework, and

• you're fairly sure that you are accepting risk,
• you can afford to be wrong, and
• your calculated upside is higher than the amount of risk you are taking,

then I suggest that you are making a gamble, technically, but I think that it is better labeled as a well-calculated risk--an intelligent one.

How can we calculate risk?

Technical traders observe patterns and base their decisions upon historical based statistics. They will make decisions in terms of, "...when something like this happened in the past, x-percent of the time it went this way. Therefore, I am making THIS decision."

Sometimes, they are right. Sometimes they are wrong.

Actually, the best ones tend to be wrong more often than they are right, but they tend to lose only a little when they are wrong. When they are right, however, they make a huge profit that easily outweighs all of the little losses.

So for each stock play, they are taking a risk, but their overall plan is not really very risky at all.

Fundamental traders tend to review the company financial numbers and business operations numbers more often. The best ones also pay attention to the news.

The news might be accurate; it might not. Many people are influenced by the news, though, and it affects their buying and selling patterns. This principle leads to a lot of conclusions about which companies' stocks are overbought and oversold.

So this, too, is gambling, but it is a well-informed decision that might lead to a wrong prediction. This type of investor knows that he or she will be wrong sometimes, but this person is always keeping informed to make the best possible decision based upon the information obtained at that time.

This philosophy will lead to more gains than losses. So each individual buy and sell is a gamble, but this overall approach is a calculated plan--not much of a gamble.

Is investing in the stock market really just gambling?

Yes...and No. It depends.