What do stock exchanges and casinos have in common?
How many times while talking about finance did you hear someone say, “Investing in the stock market is like playing casino”? In fact, investing and gambling are related to decision making and risk – in particular the risk of losing capital in the hope of future profits.
Is trading on the stock market a gambling game? This is a question many people ask from time to time. And when you buy stocks, and they immediately go down, it is, of course, like gambling at an online casino – you can both win and lose all your money in one click. So, is there a difference between online casinos and the stock market? Do they really look so much like each other?
You can win big or lose a lot when you buy or sell stocks, as well as when you play online casinos. Can you call stock market trading a gambling game? The answer to this question is ambiguous. So we will tell you more about the similarities and differences between investing in the stock market and online casino games.
Learn more about the stock exchange
A stock exchange or securities market is a place where buyers and sellers of shares, bonds, bills of exchange, futures and other types of securities meet.
Shares represent the ownership rights of an enterprise; they may include securities listed on a public stock exchange as well as shares that are traded only privately. Bonds, promissory notes and others are loan equivalent. There are many types of securities, and each has its own characteristics, advantages and disadvantages. There are also two types of operations on the stock market: investments and trading.
Investments in the stock market
Investment is the distribution of funds or the investment of capital into an asset, such as shares, with the expectation of generating income or profit. Expectations of profit in the form of income or price increases are the main prerequisite for investing. Risk and returns go hand in hand when investing; low risk usually means low expected returns, while higher returns are usually accompanied by higher risk.
Investors should always decide on the amount of risk they may incur. The same is true for people who come to the casino to play. Long-term investors are constantly hearing about the benefits of diversifying different asset classes. However, the expected risk and return can vary greatly within the same asset class, especially if it is as large as the stock class.
Investments are oriented towards the long term. Good investors test a company before investing their money because they know that it will take a long time before they get a substantial return. Likewise with gambling – casino players try to find out any information (about dealer cards, other players and other secrets) during the game, but unfortunately they can’t have a lot of information, but for investors usually all the information is available.
Trading is the act of buying and selling securities. All participants of a stock exchange trade them, but for investors a buy/sell transaction is very rare and they make a big profit by finding a good opportunity, buying cheap and selling at a much higher price some day in the future. But traders are not investors.
Traders seek to take advantage of short-term price divergences in the market. In general, they don’t take much risk on every trade, so they don’t take much profit from every trade. Some traders usually risk 2-5% of their capital on any particular trade.
They act quickly. Traders look at what is happening in the market, and respond accordingly. Just like blackjack players, they look at what cards have already come out, what cards are now on the table and try to calculate the probability of a card falling out.
A casino game is an argument for money or something of value (called a “bet”) in relation to an event with an uncertain outcome. The main purpose of the dispute is to win money or other material values. The size of the winnings depends on various circumstances, including the skills of the player.
Thus, gambling requires three elements: a bet, risk and profit.
And, although players can not get enough information about the game situation on the field, as investors or traders, but they can compensate for this by studying the strategies of the game, the behavior of other players at the table and other nuances of the game.
Is the stock exchange similar to an online casino?
As you can see: betting, risk and profit are the main elements of investment, trading and casino games, so they are more related than you think.
In both investment and trading, as well as in gambling, everyone risks capital in the hope of making a profit. In all cases, the key principle of the participants is to minimize risk with the highest possible reward.