Investing in Stocks Is Just Like Gambling.
This reasoning causes many people to
shy away from the stock market. To understand why investing
in stocks is inherently different from gambling,
we need to review what it means to buy stocks. A share of common
stock is ownership in a company. It
entitles the holder to a claim on assets as well as a fraction of the profits
that the company generates. Too often, investors think of shares as simply a
trading vehicle, and they forget that stock represents the ownership of a
company.
In the stock market, investors are constantly
trying to assess the profit that will be left over for shareholders. This is
why stock prices fluctuate. The outlook for business conditions is always changing,
and so are the future earnings of a company.
Assessing the value of a company isn't an easy
practice. There are so many variables involved that the short-term price
movements appear to be random (academics call this the Random Walk
Theory); however, over the long term, a company
is supposed to worth the value of
the profits it will make. In the short term, a company can survive without
profits because of the expectations of future earnings, but no company can fool
investors forever - eventually a company's stock price can be expected to show
the true value of the firm.
Gambling, on the contrary, is a zero-sum
game. It merely takes money from a loser and
gives it to a winner. No value is ever created. By investing, we increase the
overall wealth of an economy. As companies compete, they increase productivity
and develop products that can make our lives better. Don't confuse investing and creating wealth with gambling's zero-sum
game.