Isn’t the stock market gambling?

When I hear this question, occasionally I am tempted to respond ‘what is gambling’?

This isn’t just a flippant response—it is that—but it is also useful for clarification.

One definition of gambling is the attempt to win against overwhelming odds, essentially hoping that you’ll receive an over-sized pay-out.

Of course, gambling comes in a variety of forms from the impossible-to-win lotto to a night of poker with friends where you might just be the best player who will consistently win.

In a similar way, one can choose to gamble in the stock market (angling for oversized returns) or to make logical investments that will most likely pay off over time.

Many factors affect one’s ability to make money in the stock market (purchase price, dividends, etc) but the fundamental difference remains—stock is concrete ownership in a public company. While a purchased lotto ticket will soon become worthless and a night of poker can go horribly wrong despite your skill, purchased stock will retain some value as long as the company remains in business.

What about the risk of the company going out of business? Tomorrow we’ll answer that question and discuss one possible solution—index funds.