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20 Aug 2021

Are you investing or gambling?

Investing vs gambling | VI
(c) Sadie Xiao


People who put their money in the stock market often call themselves investors. However, there is a fundamental difference between real investors and gamblers (or market participants).

If you’re wondering what the difference between gambling and investing is, read on as we contrast the typical decisions and actions of gamblers and investors when dealing with various market scenarios.

Hot stocks or quality business

Investing or gambling? | Hot Stocks or Quality Businesses?

Gamblers (or market participants) often make their buy or sell decisions based on what others are buying. They take ideas from what other people talk about. They buy any stock considered "hot" at the moment.

Without a real comprehensive understanding of what they are investing in, gamblers simply buy and cross their fingers that the price appreciates soon.

Real investors, on the other hand, understand that behind every stock is a business ownership. Buying a stock is essentially buying an ownership of the business. When you buy a share of Facebook, you become a part-owner of Facebook's business. This goes with other listed companies in the market.

Investing, therefore, is asking the truly important questions, i.e. questions relating to the fundamentals of the business you are buying.

See also: Look at these 3 key things before investing

When you are a real investor, you consider whether the price you are paying for the company is worth every cent. Put simply, real investing is attempting to buy a good company at a fair or undervalued price.

When the stock price falls

investing or gambling | when stock prices fall

At times when there is a drop in share prices, what do investors and gamblers do?

Understandably, emotions are intensified. Some feel excited. Some get scared. Not knowing the fundamentals or value of the stock you have invested in will result in uncontrollable panic should the share price suddenly drop.

See also: What investors see in a bear market (2021)

If you’re a gambler, you tend to doubt your decision and even get tempted to sell the stock at a loss. Worse still, you may feel a rush to buy the stock. When you do not know the value of the stock, a decline from the previous high may lead you to think that it is a good opportunity to buy. Gamblers also opt to wait, thinking that the price will rebound to its previous price.

Doing any of the above without actually knowing the stock’s real value will likely be a decision you’ll not be happy nor proud of. Hoping for others to be as (if not more) irrational as you are, thus drive the stock price back up, is like waiting for a genie in a bottle to appear.

If you’re a real investor, you know the value of the stock that you are buying. In other words, you understand the underlying business of the stocks you invest in.

If there is an unfavourable change in the underlying business which results in the decline of share price, real investors will not hesitate to sell, even at a loss. They do not wait for the price to rebound or treat it as an opportunity, because there is no underlying reason to support it.

However, if the fundamentals of the stock are still intact, they will treat it as an opportunity and buy accordingly. Real investors understand that price is what you pay, value is what you get.

See also: 5 Reasons Why Value Investing Works for Everyone

Reaction to volatility

investing or gambling | market volatility

We all know how volatile the stock market is. When the share price of the stock you bought rises, do you feel excited? When it drops, are you disappointed? Gamblers often have these feelings. They are generally afraid of volatility in the stock market.

On the other hand, real investors tend to feel indifferent towards stock market volatility. They understand that volatility is a norm in the stock market and that it is in volatility that good opportunities present themselves. As such, they use the market's volatility to buy good companies at the right valuation.

So, are you a gambler or an investor?

If you want to understand more about investing in the stock market, we encourage you to register for our free two-hour masterclass.



Disclaimer

No income guarantee or promises of any type are being made in this article. Know that your results will vary due to circumstances that are outside of our control. The author and the company do not warrant, guarantee, or make any representations about the use or results of the use of the products, programmes, services, and resources mentioned in this article. The reader, thus, agrees that the author and the company are not responsible for the success or failure of readers’ investment and business decisions relating to any information provided herewith.