One of the most common misconceptions about buying stocks is that it's akin to gambling. Many people with savings are extremely reluctant to buy stocks for fear that they'll lose everything, just as a gambler can instantly lose a bet at the roulette table if the wrong color comes up. Unfortunately, the financial media only makes matters worse. Talking heads on financial television speak all day, every day, of buying and selling stocks. They only spread the notion that buying stocks is the same thing as gambling.
But that's not at all the case. While it's true that a certain form of speculating in stocks, namely day-trading, is indeed very similar to gambling, investing for the long term is a much different story. Buy-and-hold investing is not gambling at all, but rather business ownership that gives patient investors the best shot at building sustainable wealth for the future.
The stock market is not a casino
With buying stocks as easy as clicking a few buttons on a computer, investors have become detached from the process. But it's important to remember what buying stocks actually means. When you buy a stock, you are buying a fractional piece of a real physical business. You are now a part-owner of this business, and as such, you are entitled to a proportional share in the profits that business generates. Over time, this results in solid gains over long periods of time.
Consider that according to Standard & Poor's, the S&P 500 Index registered 5.7% annualized gains over the past decade, not including dividends, which add another couple of percentage points to total returns. And keep in mind that this period includes the Great Recession, one of the deepest bear markets in history. By comparison, gamblers are virtually assured to lose money to the house over long periods of time. PBS calculated earlier this year that roulette players who bet $100 per hour will lose more than $5 per hour on average. This helps explain the age-old saying, "The house always wins."
Some investors mistakenly believe investing in stocks is similar. But that's only true if you engage in frequent trading. In that sense, you're competing with other investors. But if you buy high-quality stocks and hold them for long periods of time, history has shown us that the increasing profits generated by the best businesses produce solid annual returns.
One exception: day trading
However, it's worth noting that the stock market can, in fact, mimic a casino in one key aspect. Day trading, in which a person buys and sells stocks multiple times over, is actually similar to gambling. The day trader is speculating on short-term price movements and is generally not concerned with owning a real business and a share of its profits over a long period of time. But this kind of speculation can be done in other markets, not just stocks. A person who flips real estate will buy and sell properties hoping for a short-term gain on the price differentials, and that's essentially the same concept as stock speculation.
The bottom line is that when it comes to any market, stocks or otherwise, an investor can turn it into a speculative act if he or she so chooses. But that shouldn't dissuade those with savings from investing in stocks. The stock market was never meant to be a get-rich-quick scheme. It's supposed to be a place where everyone can own a piece of corporate America and share in the profits, and research has shown that owning stocks is the best way to create wealth over many years. Gambling is something very different and much riskier, and it's time for people to stop assuming that long-term investing and gambling are one and the same.