Is buying shares a form of gambling?
I have read a lot about buying shares on the stock market. However, the more I read, the more I get convinced that buying stocks is not different from gambling. Is there really any difference between buying shares and gambling? Also, as you tackle this, just when do you know it is the right time to buy and it is the right time to sell or is it just a gut feeling.
Thank you, Samuel for sharing this concern on the difference between gambling and investing in shares. It is an issue many people are struggling with here in Kenya and the world over. Many people have lost money in both gambling and in honest investments for very much the same reasons.
Investing is really the acquiring of an asset (for example shares of a publicly quoted company or privately owned company) for purposes of making a gain in the growth in value of the asset, receiving cash returns while holding the asset (dividends), and or making a profit at the point of disposal of the asset (capital gain). Gambling on the other hand involves doing something that involves risk that might result in loss of money or any failure, hoping to get money or achieve success. Usually the opportunity for a gamble is pretty much 50-50.
In a recent piece in which I discussed financial literacy, I mentioned that at the very basic level, it is about having the knowledge, skills, and confidence to make responsible financial choices. The key being the responsible nature of the financial choice.
Knowledge is really what you can do with confidence because you understand how it works. When you apply the knowledge repeatedly, you get skilled through adding more insight as you handle different situations affecting the value of the investment. Incidentally both gambling and investment require mastery, the only difference being what is being mastered. Gambling is an art, involving playing around with patterns. Investing requires mastery of the business environment factors which affect supply and demand of goods, costs of doing business, the prices and in overall the profitability of the business.
It is through the processes of engaging with the ownership of the asset while the business environment is changing rapidly that you learn more on the factors that cause the value of the asset to grow or drop (investing knowledge). You will have mastered the factors – for example a long-term increase in borrowing interest rates favour lenders whose income will rise. This prospect for a rise in income leads to corresponding growth in demand for the bank shares, which pushes the price of the share up.
Those who were holding the shares before the increase in lending interest rates occurred, benefit from the increase in the share value besides receiving dividends after the end of the year. Even if the interest rates did not increase, the investor is still entitled to receive a dividend by virtue of owning a share. Owning shares not only gives positive dividends, but you also share the misfortunes of the business where it does not make enough money to pay its costs and share out the excess income as dividends.
A case in hand is the effect Covid-19 on how we make payments over the last 18 months – moving from cash to cash less. Safaricom as a provider of cashless payment solutions has benefitted from an increased number of people using their M-Pesa systems, which now mean more commissions to the company.
Such events that affect the business condition can be predictable. More especially where economic factors such as interest rates, inflation rates, exchange rates, and swings in supply of raw materials and so on with distinct patterns affecting the business environment are involved. They either promise growth or that lead to loss in asset value depending on the direction they take through affecting the share supply and demand patterns.
Armed with this experience you will be able to buy or sell an asset at the right time or hold an asset for longer waiting for the things to turn around in your favour. Knowledge and then skill is acquired through being involved with investments affected by these factors. Those skilled in investing sell the share when its future earnings prospects are getting deeming. Those who do not know buy such shares from them.
Gambling on the other hand is hopeless prayer with underlying factors driving the outcome other than the experience you gain from repeatedly reading other gamblers patterns. Anytime you buy an asset you understand the factors driving its value, you are no better than a gambler except that unlike a gambler who either has all or none kind of options, because you have your asset with some value in it.
Patrick Wameyo is a financial literacy and entrepreneurship coach at Financial Academy & Technologies.