Investing versus Gambling in the Stock Market

When we enter the stock market – or contemplate doing so – most of us think we’re investing. But is that always the case? Whether or not we like it, the stock market offers more than ample potential for gambling and we can come closer to doing this than we believe possible. Consider the similarities between gambling in a casino and investing in the stock market:


Photo by Håkan Dahlström via Flickr
  • Both stocks and gambling involve a great deal of chance – you can make money or lose it in either, and you’re never exactly sure how that will play out
  • Both gambling and the stock market have experts who claim to know what’s going on but often don’t
  • Both gamblers and stock market investors often enter the game believing they possess an angle – inside information or a methodology that stacks the odds in their favor
  • Both the gambler and the stock market investor come to the table to make money
  • Gambling is a game you play, but it’s also often said that you “play the stock market”

Considering that the two activities have so much common ground, how do you know when you’re actually investing in stocks — or merely gambling?

You’re Gambling in Stocks When…

  • You buy on the “Greater Fool Theory”. This is the practice of ignoring the fundamentals of a stock on the misguided notion that there will always be someone else out there who will pay a higher price for it — a greater fool. There are times when the only attraction of a stock is that it’s rising in value, and you buy in with the intent to ride the elevator up for while, then selling for a nice profit. When this works, you might feel like an investor, but when it doesn’t you’ll know you were just gambling!
  • You ignore market levels — even buying when the market is high. You follow the herd into the market even after a long run up and assume that the crowd must be right. You’ve heard the warnings that stocks may be pricey, or that price/earnings ratios are excessive, but plunge in comforted by the notion that so many people could never be wrong.
  • You load up on one or two stocks. You’re so certain that you’ve found a couple of winners that you pour most of your cash into them, ignoring the consequences of being wrong.
  • You buy on “hot tips”. You rely on the knowledge of others – often other gamblers – for your investment information. No need for any lengthy research, “Bob knows what he’s doing”, even though you’ve never verified his success.
  • You’re looking to make a quick hit. There’s no long term strategy, you just want to get into the market, make some fast cash then move on. Then when ever you’re ready, or need money, you’ll just do it again. Simple!

You’re Investing in Stocks When…

  • You buy income streams. You are not only looking for stocks that pay solid dividends, but those that have a long history of doing so. Sure you want capital appreciation, but you recognize that having an income stream on your investment gives you the ability to wait out the dips.
  • You’re diversified. You recognize that an entire stock group can fall out of favor for long periods, so you maintain positions in different sectors. But you also of have money spread out over different types of investments, like cash and bonds, that will either be less affected by down markets than stocks, or even completely unaffected.
  • You buy value. You’re not interested in the high flying stocks of the day because you know that circumstances can change rapidly in the financial markets. You take the time to seek out stocks that represent good value but have been ignored by the market. As a long term investor, you recognize that these will be the high fliers of tomorrow — and you’re willing to wait because you know that the greatest rewards go to those who get in early.
  • You buy more in down markets. You’ve disciplined yourself to buy when most others are selling because you know that’s when the richest opportunities present themselves. Conversely, you’re not buying at market peaks, and may even be selling.
  • You’re in it for the long haul. You think of your investment strategy as “patient capital”, and recognize that efforts at get-rich-quick usually land people in the opposite direction. You understand that decades of double digit returns will prove to be more profitable than attempts at doubling or tripling your money in one year or less.

Looking back, were there times in the past when you were gambling more than investing in the stock market?

About the Author

By , on May 12, 2011
Kevin Mercadante
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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Leave Your Comment (7 Comments)

  1. Nick says:

    I just can’t help but chuckle when i read this article. it brings up some great points but i must say that anytime you you invest in the stock market you are gambling, no matter what. You cannot control the weather, or the health of those high up in any organization (look what happened to apple’s stock when steve jobs was sick).

    i just have a hard time sleeping at night when for the past 30 year the baby boomers have been ‘diversifying’, ‘buying in down markets’, and ‘investing for the long haul’ and it has literally got them nowhere.

    • Kevin says:

      Hi Nick – Your not too far off base with that observation! Obviously, the stock market isn’t a guaranteed return/principal arrangement in the way T-bills and CDs are. But at the same time it offers potentially far greater returns.

      There is an element of gambling in stocks under the best of circumstances, and that’s why it become critical to separate calculated risk from blind gambling. It’s a matter of stacking the deck in your favor at every turn. No guarantees of course, but a much better shot at better returns.

      Also, when I say buy in down markets, I’m thinking more in terms of Spring 2009, or mid-2002 when the markets had crashed and the scared money was flushed out. I don’t mean the stereo-typical “buy on the dips” that Wall Street cheerleaders shout at the slightest pullback. The history of those buying at market bottoms is very favorable.

  2. Wait, you guys mean penny stocks aren’t investments? 🙁

    In all seriousness, any time you have an open a free market you have the opportunity for scams or quick-rich ways of thinking. Definitely not the way to go, but can be easy to fall into.

  3. Bartek says:

    The sad thing here is, that this is just about basics, and it’s true, but most people just don’t respect this rules. Get rich quick scam is still (was and will be) popular in the stock market.

    • Kevin says:

      Bartek – Get rich quick is the lure for many, though it isn’t discussed all that often in connection with stocks. That’s really the driving force behind the gambling aspect and it may be that a lot of people don’t fully understand the difference vs. investing.

  4. Kevin – I could have guessed this was your article. You say what I think, you just write it better! I would like to add another test for investing versus gambling. If the money at risk is being divided from a static or shrinking pie you are gambling. In investing the pie should be growing and getting larger over time. Just another good concept for people to distingish between the gambling and investing.
    Thanks again for another great article.
    Ken

    • Kevin says:

      Hi Ken, thanks for the comments. I would agree with what you’re adding. I’ve heard that referred to as “scared money”, which is basically playing with money you can’t afford to lose. Very good point!

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