Investing in stocks could be a solid means of growing wealth. But that doesn't mean everyone's comfortable with it.
Recently, I was chatting with a friend who told me that despite having some spare cash on hand to put into the stock market, he was instead leaving that money tied up in the bank. I pushed him a little for an explanation, and his response was something along the lines of "I'm not a fan of gambling."
I understand where he's coming from. Though I've spent time in casinos for social purposes, the most I'm really willing to part with on a given night is $50, and generally, I make a point to stick to the least expensive slot machines so I can at least get some entertainment value out of the deal.
The reason I don't like gambling is that I work hard for my money and don't enjoy the idea of just tossing it away. But I'm also a firm believer that investing in stocks is not like gambling at all.
You can support your investments with research
When you play roulette and put $100 on a specific number on that wheel, there's not really much reasoning behind it. Sure, if you've been at the table for a while, you can try to keep track of which numbers have or haven't come up to help guide your decision. But let's be real -- there's no true set of logic behind picking a random number.
Similarly, when I sit down at a random slot machine, there's absolutely no way to know whether I'll encounter a series of bum spins, or whether I'll hit the jackpot.
Investing in stocks, however, is very different for one big reason -- you can research different companies and make an informed decision based on actual financial data.
First of all, there are different financial ratios you can look at to see how well a company is doing. The price-to-earnings ratio, or P/E ratio, for example, can be used to determine whether a stock's price accurately reflects its value.
Another metric you can use to evaluate stocks is earnings per share, or EPS. Earnings per share is basically a company's profit divided by the number of outstanding shares it has issued, and it speaks to how well a company is doing.
There are other important factors you can look at when deciding whether a given stock is worth adding to your portfolio:
- How much debt the company has
- How much growth potential the company has based on different products or services it's in the process of developing
- How innovative the company is compared to its competitors
- How experienced and savvy the company's management team is
The great thing about publicly traded companies is that they're required to disclose their financial data, so if you're willing to put in the legwork, you can determine whether a given stock is a good buy or not.
Now this isn't to say that you can't ever be wrong about a stock. You can do your research and still lose money if a company starts hemorrhaging cash, or if, for example, a product in its pipeline doesn't pan out.
The point, however, is that you can base your decision to buy stocks on actual data and knowledge. And that's why buying stocks is a far cry from throwing $20 into a slot machine and hoping for the best.
Of course, it's still natural to have some hesitations about buying stocks. But don't stay away because you're not a gambler. Neither am I, yet I own dozens of stocks that I plan to hang on to for a very long time.