Is the Stock Market a Place For Gambling?

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.

From the above explanation we can summarize as follows:

In Real estate investment, you have to wait for years to make a profit after you buy land.
The prices of Gold change every day, so even if you buy and sell gold frequently, you won't make a lot of money.
When it comes to FD, you can’t break the FD and withdraw your money immediately and invest it in another bank that gives a higher interest rate. Returns are fixed and predictable.

Now we know that liquidity isn’t there in other investment classes. But when it comes to the stock market, it’s volatile and has good liquidity. People can buy and sell their shares in a fraction of a second, hence there are immediate buyers and sellers.

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 every day people see a lot of volatility in the share prices, many start assuming that they can make a lot of money by buying low and selling high and that’s when they start getting trapped into the market doing intraday. They thought they could replicate this process daily and end up making a profit. They try to time the market and try making the odds in one's own favor, that's when it turns to a gamble.

Mankind is genetically greedy by nature and a stock market is a place that excites our greed factor. So, the myth originated because a lot of people engage in intraday trading, try to time the market, and eventually end up gambling in the stock market, as the results were immediate like any other game.

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.

Not everyone who goes to watch a horse race is a gambler. Some are there to enjoy the show. The same is true in the stock market, where many come to invest while others do short-term trading with little self-control and end up gambling.

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.

The people who invested early got more benefit when company turnover compounded over time. So, every common man can benefit from the stock market if they take the market in a positive way. However you certainly have a choice, you can keep thinking that it's a place for gambling.

There is a great saying that “You become what you think”. So if you keep thinking that the stock market is a place for gambling, maybe you end up doing gambling one day.

The majority of people start trading out of greed, because of the liquidity and volatility. When they trade, it comes at a cost. And that cost is huge, whether it is brokerage or impact cost. People start losing money due to their low self-control and this is the reason there is a lot of study going on in the area of behavioral finance. So when they start losing often they call it a place of gambling.

If the Stock Market is not for Gambling then why does it exist?

Before knowing why the stock market exists, let's understand more about businesses. Let’s take the example of two friends who want to start their business. They need resources like human resources, money, and required machinery. But money is the main resource that can buy every other resource.

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.

So, what will they do? They can go to banks. They might get a secured loan by keeping their property as a mortgage with the bank or an unsecured loan by paying additionally for higher interest rates. So they can get the money from the bank and their problem gets solved.

Before going further, let’s understand how the banks work.

Bank Business:

Bank Business is to make money from common people at smaller interest rates like current account and fixed deposit, where they give small interest of 4 to 5 percent to us and lend money to people who can give higher returns. They are ready to lend huge amounts to businesses because through business loans they earn higher interest rates.

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.

In our example of two friends, who wanted to expand their business, banks refused to lend them money. Now how can they get the money? In this situation, they will have a lot of confusion. But they are eager to grow their business.

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.

Both the friends are having 100% equity at the moment, if they want to give 5% to the public and raise money then their shares will become 95% and the public will become their partner.

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.

Secondary Market:

The secondary market is where investors buy and sell shares, which they have already bought from the primary market through IPO. Our Indian National Stock Exchange and Bombay Stock Exchange are facilitating the trade of shares in the secondary market.

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

Kundan Kishore
Curator of " A Complete course on Indian stock market".

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