I did not personally know anyone who invested in the stock market while growing up. In fact, growing up, the notion of the stock market was quite foreign to me. On one hand, I understood that it was something only for financially-educated people with a lot of money. On the other hand, I understood it to be something that involved risk–that it was something similar to gambling. It was not until I got older that I learned that investing is something anyone can do. Nonetheless, I continued reasonable to ponder whether investing in the stock market is the same as gambling.
After educating myself about investing in the stock market, and dabbing into it myself, I have learned that there are, indeed, ways in which investing in the stock market is the same as gambling, and other ways in which it is not.
It’s Not Completely True that Investing in the Stock Market is the Same as Gambling
Investing in the stock market is different than gambling because, when done prudently, the chances of earning money are much greater than the chances of winning the lottery, for example. Of course, prudent investing is difficult to define. After all, there is no guarantee that taking certain steps will yield positive results. But there is enough historical precedent to argue that following certain steps will, in fact, lead to good investment results. This in itself is a differentiating factor between investing and gambling– because there are no reasonable steps that improve your chances of winning the lottery, for example.
In order to invest, you do need to have some very fundamental knowledge of the investment process. This is important so you are able to make smart investment decisions about your money. Also, while it might make sense to pay others to invest for your, as by consulting a financial advisor, you’ll want to be knowledgeable about investing to ensure that your consultations with the financial advisor are effective.
Yet, In Some Ways, Investing in the Stock Market is the Same as Gambling
If you invest all your money at once, investing in the stock market is the same as gambling because you are risking potentially losing all of your money, with nothing to fall back on. Historically, despite ups and downs, the stock market has gone up over time. However, it is impossible to predict if at any given time the stock market will go up or down. Thus, if you are unlucky with your timing, a large portion (or all) of your investment might disappear. So if you invest all your money at ones and loose it all, you will surely be upset.
Rather than invest all of your money at once, you should first of all ensure you have an emergency fund saved outside of the stock market. And, of the money you would like to invest, you should invest it over time rather than all at once. This practice is called dollar cost averaging and decreases the chances that your investments will be impacted by volatility of any given day.
Investing in the stock market is the same as gambling also if you invest all of your money into a specific stock. Or if you engage in practices that are extra risky. For this reason, you should diversify your portfolio by buying diverse investment vehicles and staying away from practices such as day trading or the purchase of futures.
While there might be cases where it might make sense to sell stock rather than hold it, in most cases, the recommendation would be to hold onto a well-diversified portfolio. Chances are theses will recover losses, and earn gains, over time.
Things You Should Know Before You Invest in the Stock Market
1. You should be able to know how to open a brokerage account and buys different investments. Do a little bit of research on the different brokers (e.g., Merril Lynch, Fidelity, Vanguard, TIAA, Transamerica, Charles Schwab, TD Ameritrade, etc.).
2. Learn about the different types of investments vehicles. For example, you should know what a stock and bond are, as well as the different investment classes, such as mutual funds, and exchange-traded funds (ETFs).
3. Also learn about the investment vehicle classifications. For example, is the investment taxable or tax exempt? Is it domestic, international, or a combination of both? Does it cover all the market or does it capture a specific sector, such as information technology, healthcare, or real estate? You might also be interested in knowing if the investment is a value or growth stock, or a blend of these, and whether it is made up of stock of small, medium, or large companies.
4. Become familiar with expense ratios, commissions, as well as distribution schedule. Compare these figures of different investment products, and also take a look at how they have performed over time.
5. Realize that you will be taxed from earning only when your remove money. It is good to keep in mind that earnings are taxed more favorably when you have held the investments long term rather than short term.
6. Be aware that, regardless of how prudent you are, investing inevitably involves risk. While your chances of earning might be greater than with the lottery, the possibility of losing money is very real. Also, unlike money stored in banks, money in investment accounts are not insured.
Learn More About Investing
You don’t need to have a finance education in order to learn or understand these concepts. Simply browse the internet, or purchase books or trainings explaining the basics. It’s best to read multiple resources to get a more well-rounded education, and to reinforce the concepts.
Reading a book like Beginning Investing is a great start as it will give you an overall understanding of investing.
Strategize Investing in the Stock Market So It is Not the Same as Gambling
I had no idea of all of these different things when I started out, nor that the DOW and NASDAQ are just two of the many stock markets worldwide. While even now there is still a lot I don’t know about the stock market, I believe I now know enough to make educated investing decisions.
Fortunately, I have generally excelled at math and am a pretty cautious individual. This has been an advantage to me in terms of making smart financial decisions. I also had a good experience in the year I started investing, so this positive experience helped me remain optimistic even when I saw periods of decline.
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I should mention that there are many different trains of thought in terms of how to invest your money. For example, some argue that it is smarter to prioritize investing over paying debt, including mortgage. To me, it made most sense to tackle mortgage up to a certain point, and then tackle both investment and mortgage. Likewise some people’s only investment in the stock market is via their retirement accounts. I personally think it is beneficial to also invest outside of retirement to be able to tap into funds without penalty.
Since only you know your own financial situation, you’ll need to do what you believe works for you. If possible, you can should consult with a professional advisor. However, I encourage you do educate yourself first to be able to have educated conversations.
Be Careful: Not Investing in the Stock Market is the Same as Gambling (Kind Of)
Just as investing in the stock market might be considered a risk, so is the risk of not investing in the stock market. If you do not invest in the stock market, your money is deprecating with time. The only way that this would not be the case is if you have that money in a savings or money market account that has a high interest rate. Usually such high interest savings accounts are offered by companies that function completely online, and therefore have less overhead costs.
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I’d like to reinforce the importance of having a healthy amount of money set aside in your savings account before venturing into stock market investing. You should not invest this money even once you start investing. It will serve as safety net in case your venture into the stock market does not work out well. Of course, you might need to delay investing until you pay off some debt and build your saving. However, these are important things to do to ensure your long-term financial stability.
Conclusion
The notion of investing in the stock market once intimidated me. I also was under the misconception that investing in the stock market is the same as gambling. While I am still no financial professional, I am now comfortable with investing. In fact, I wish I had learned about it, and dabbed into it, earlier.
The truth is that there are just a few things that you need do and know before dabbing into investing. So long as you are prudent in how you invest, your chances of making gains will outweigh your chances of loses over time. You should furthermore ensure that your are financially stable enough to start investing.
I urge you to learn and dab into investing as well. Just remember to educate yourself and to invest in a prudent manner. This way you will ensure that your investment in the stock market is not the same as gambling. You can learn about it by researching online (i.e., reading posts as this one) or purchasing books about personal finance or investing. Start learning more about to investing in the stock market today!