Most people that don’t trade stocks, especially those with not-so-great-education or in developing countries, believe that stock trading a sin. They think it’s a form of gambling, because one has a chance of winning and has a chance of losing.
However, here’s why I don’t think it’s a form of gambling (or a sin):
- When you do anything in life that is worth doing, you’re taking a risk. When you’re doing a trade in the normal, non-stock world (for example, you’re buying and selling apples), there is a chance that you will make money, and there is also a chance that you lose (if, for example, the market is suddenly flooded with apples, then the price of the apples will be less than you bought them, and now you have to sell them at a loss). How come buying and selling apples is not a sin, while buying and selling stocks is?
- Most investors pick stocks after doing their due diligence. They study the company, the trend of the stock, and other technical details before deciding on a stock. Compare that with gambling, where picking numbers is completely random, and luck is heavily involved.
- At one point, most people make money with their stocks, if they are patient and they don’t panic and they’re not greedy. Not selling at the right time is the reason why most people lose money on a stock. Compare that with gambling, where either you win or lose.
- Stock movement is not controlled by luck, it is controlled by known factors (such as company news, technical details of the stock, political news, economical news). Gambling consists of pure luck, bluffing, and some intelligence.
Can stock trading turn into gambling? Yes it can, this usually happens when someone does not accept loss as part of the game, this person starts doing the same thing over and over again in hope that one day he will make money, but instead, keeps losing and losing money. I’ll give you an example of this: Someone buys 1,000 shares of BAC at the current price of $7.25 in hope that the stock will reach the $10 level again in a few days. The stock drops to $6 early next week. The person panics and gets out of the stock. The stock then moves up to $10 2 weeks after, the person buys a thousand shares again, at $10,000, thinking that the stock will go up again. Immediately after he buys the stock drops to $8 because BofA was penalized for another mortgage related scandal. The guys sells again, and then buys, and then sells – all at a loss. That person is no longer trading, he’s gambling, he’s obsessed with making money just to satisfy his ego, just to demonstrate (to himself maybe) that he was right the first time. In stock trading there is no right or wrong, there is something called learning from your mistakes. Losing is part of the game… Note that the SEC admits that stock trading can become gambling on its website (I can’t find the link right now, but I remember that line “if you’re gambling in our markets…”).
Note that in many countries where gambling is not allowed, stock trading is allowed and encouraged…