Monday, November 22, 2004

To Gamble or to Invest - Is there a Difference?

Well, financial and investment portal, Motley Fool, thinks there is.

Spurred on by a comment that the stock market is merely a casino for the rich, in their 'market comment' column, Why Investing Beats Gambling succintly points out the differences between the two - and it boils down to the concept of winners and losers

Simply put, when someone gambles, the player is explicitly trying to win a game of chance - and by implication there will be losers. Furthermore there is often a transfer of money from the loser to the winner (although that is not always the case)

However, when someone buys shares, the investment is subject to the market perception of the company and its future performance - so if the company does well, the profits made are generated by the extra value of the company. There is also no transfer of money from the loser to the winner - since the buyer and the seller both 'profit' from the transfer (whether by buying into a company, or selling to gain a more preferred standpoint)

The other key difference is the longterm view. By its very nature, over a long term period, the house-edge ensures the player will ultimately lose - put another way, the house always produces odds in their favour.

Conversely, the expected return from the stock market, over a longterm period, is one of profit not loss

The writer has produced a great article about the differences between gambling and the stock market - however, its naturally always going to root in the favour of the investor. Investing in the stock market over the long term fails to acknowledge the short term gain and excitement that the gambler plays for - like the day trader in the financial markets - whilst the longer term professional gambler will also look for percentage point increases and advantages

Personally, I stopped investing in the stock market years ago. The 99% losses incurred in the boom/bust technology era was way too dangerous for me!

posted by jo @ 2:18 PM   2 comments

2 Comments:

At 10:19 PM, Anonymous said...

I think there are losers in investment too. Stock market rises and falls as economy rises or falls, otherwise something is wrong (2002, 1927 for example). And some of investors make more money than others, but in average they all wins/lose as the economy. Its like gambling (I speek about sport betting only, other konds of gambling is solely dull wasting of money, you cannot beat math), the most people lose and some (let say 3% and bookies) earns.
Personally it's long time ago last time I bought shares... but remember it's that exciting feeling when buying shares, wil it rise or fall :-) Planing to play on stock market again :-)

A reader from Czech republic

PS I like your blog very much
PPS sorry for my poor english

 
At 10:47 AM, jo said...

Hey, if you're planning to play on the stock markets again - you better give us some tips.

I used to do it a few years back - but I agree, I thought it was a gamble. Some shares I'd make 20% some I'd lose 75% and in the end, the risk wasn't worth it. But I'll go back and dabble again one day

(and welcome aboard!)

 

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