Is investing in stocks equal to gambling?

Many people believe that putting your money in stocks is equal to gambling. But is it? The answer is yes and no.

There are people in the Indian share market who treat the trading as a means to make quick money. They will buy on rumors or tips from friends, relatives, online forums in the hope of making a fast buck. They may have not even heard of the stock they want to buy. They have no use for fundamentals, state of industry or economy. They dabble in penny stocks. And they always have unreasonable expectations of return, without a true appreciation of risks. This sort of trading is in a way gambling trick cards.

There are millions of other investors who make informed decisions while buying stocks. These decisions may be based on technical analysis, fundamental analysis, financial, understanding of a company, understanding of risk and reasonable expectation of return. These investors aren't gambling. They are basing investment decisions on a proper study of the markets, prices and weighing the risks.

These investors usually have a long term perspective on the Indian share market. They don't check live online prices every few minutes on the stocks they own. They are, usually, indifferent to short-term price action. And have no use for rumors and ‘insider' tips.

Of course, profits are never guaranteed in the share market. But, informed investors lower the risk of loss juice cards and reduce the chance aspect in their investments.

Another fundamental difference between stocks and gambling is the ability to cut your losses. Consider that an individual bets on a number in roulette and loses. There is no way he can cut his loses. The money he has invested is gone. However, if the same individual buys shares of a company and tracks the stocks, which can be easily done by observing and analysing online share prices, he/she can pull the money out if he/she senses a risk of the stock losing value in the future, or minimise losses if the share price comes down.

Gambling whether on stock markets is a zero sum game. There is no creation of new wealth. Whereas investing in the stock markets is a way of providing funds to companies to provide services or manufacture products. And over the long-term leads to wealth creation. Hence, it is not a mere transfer of wealth from one hand to another, but creation of new wealth.