IS THE STOCK MARKET A PLACE FOR GAMBLING?
It's high time to bust one of the biggest myths associated with the Indian Stock Market, the one that says ‘Stock Market is a place for gambling’. Whether it is a place for gambling or investing, or if it’s still a mystery, no one knows. The only way to decode it is by using a few facts, figures, and the opinions of the people who have been there.
Anytime I visualize the stock market, I picture these in my mind- the Sensex, television news, red and green bars, NSE and BSE buildings, news on the market crash, someone banging the head due to a loss, someone showing his fist on a win, etc. So these things give a lot of adrenaline rush to common people. There are also other activities that can make people happy and sad almost instantly when winning or losing.
We have heard the history of gambling since the time of Mahabharata, it's no new affair for Indians.
The entire gambling market in India reached a value of 12.5 billion USD in 2019. A lot of sports betting sites and apps emerged in India, some of which were even endorsed by famous cricketers and celebrities. Apps like Betway, Parimatch, Pokestars, Bet365, 10CRIC are such examples. Sports betting ranks 40% of the world's online betting industry, followed by casino, poker, and other games.
If we closely relate the stock market with other games, we start getting the perception that the stock market is also a game. Maybe people feel the similar excitement of playing cricket or football, as a lot of them bet on these games. We have also heard that the biggest of cricketers were involved in such betting's. Let's understand the correlation here.
Why did this myth get established?
The stock market may be a place of gambling or may not be. Let's dig a little deeper into certain aspects. Instead of thinking of the stock market as a game, let's understand the stock market as an investment instrument. A comparison of the stock market with some of the other investment instruments can help us understand why this myth got created.
Stock Market vs Real Estate:
Common people and investors choose real estate as an investment. They feel the land value or house value will appreciate over a period of time. They can’t sell their land or house immediately, they need to wait for the value of the land to increase, to make a profit.
Also buying a property for investment takes a minimum of 8 to 10 days for registration and documentation. So there are many things to overcome regarding the liquidity of any kind of real estate. Thus in real estate investment, the buying and selling process cannot be done immediately.
Stock Market vs Gold:
Since ancient times, Indians have been fascinated by gold purchases. We are highly exposed to gold because of our cultural needs like marriages and other ceremonies. It's a cultural investment and women are more passionate when it comes to gold.
Gold as an investment does not produce anything and helps people for the long term only. Gold prices should always be monitored because there are chances of gaining or losing money.
Stock Market vs Fixed Deposit:
Have you ever thought about why do banks pay you interest? Because they lend this money to big businesses, who in return pay the bank a higher interest rate than FD returns. So the bank takes our money and invests in businesses and makes it their own business. And they pay the common man an interest rate of 4% to 6% annually. Bank FD returns are fixed and predictable and it won't help you to beat inflation.
It's the broker's community and outside forces that support this whole market and they are the people that connect the clients to the exchanges. Since they are only able to benefit from the brokerage when a client trades, there is a huge conflict of interest. So it's, for this reason, there is a lot of liquidity in the stock market as an asset class.
As you know, the outcome in the 20-20 match is within four to eight hours. In a horse race, the outcome is available within thirty minutes, that's why people bet in these matches. But the stock market can give an outcome even in a fraction of a minute. So it can be used for gambling, and many use it for this purpose too.
Here is a reference graph and data on long-term investment
Busting the Myth:
Do you really have to believe that the stock market is for gambling? Well, there is a high chance that once your greed factor is extreme, you may also become a gambler in the stock market.
In reality, the stock market is not a place for gambling. It’s a place where businesses and corporations come forward and raise funds for their growth and expansion. Their funds come from ordinary people who are not interested in starting a business but are willing to take a certain level of risk and stick to their investments for a long time.
We have hundreds of examples of such companies where people invested for a very long term and got a win-win situation for both the company and the investors. When people come forward and invest in great companies, the government also gets its fair share of taxes and helps with overall economic development and employment.
From where do they arrange money? Initially, it can be borrowed from parents, relatives, and friends and their savings. But this won't be sufficient once their business grows. Now, they have to hire more men to provide better services or more machines to fulfill the increasing demands. But they are also aware that their profitability is limited and not enough to hire new people or set up new machines.
The bank takes fixed deposit money from common people and gives it to businesses at an 8% interest rate, which can go up to 12% to 14% depending upon the quality of the loan. So, they give a small interest of 4% to 6% to common people and get 10% to 12% interest from business loans. The difference of 6% to 7% is the bank's profit and how they run their operations.
So they can go to the public who are in various professions and not interested in doing business. They can raise money from them and make them their partners. Before raising money, they need to do a valuation of their business with the help of a stockbroker and they can go public. Banks give fixed interest rates to people but here people are getting a chance to become partners of the company.
IPO (Initial Public Offering) or Primary Market:
The first time you go to the public and raise the money you bring IPO i.e. Initial Public Offering. And that IPO gets listed in one of the stock exchanges. This is called raising money from the primary market. So in simple terms, the stock market is there to raise money for businesses.
The IPO market is called the primary market. Some people would be very lucky to get a good company in the IPO phase. Like if the application from the people exceeds the number of shares listed by the company then not everyone would get it. For the primary market, there will be given a time period within which the public can go and apply for the IPO.
Once they get the IPO, on the day of listing they can either sell it or buy more of it, and later the stock starts getting traded in the market. Some may not be able to buy in the primary market so they can buy on the day of listing.
In the secondary market everyone (FII/DII/Retailers) is openly buying and selling stocks. This kind of transaction goes in between investors, not to the company that has issued the stock. You can see companies like reliance, Infosys, Wipro trading in the market, and the market price keeps changing every day that happens in the secondary market.
Why must each of you participate in the stock market?
Now all of us are clear that the stock market exists as businesses need money. Stock exchanges are the necessity of a capitalistic system of economy.
It's advisable to believe in the fair part of the stock market and belong to the right group, who thinks that a stock market is a place where they can invest their hard-earned money and beat inflation, and support capitalism by becoming a part of businesses.
Behind every stock, there is a company. - Peter Lynch
Curator of " A Complete course on Indian stock market".