Why isn't playing the stock market considered as Gambling?

…and therefore tightly regulated & controled by states?

The DJIA is down 160 points today. There have been days much worse. People sometimes lose their shirts taking risks with the stock market, often spending money they can’t afford to lose in the hopes that a certain stock will take off and they’ll be able to cash in.

Why are state governments so anal about who can open up gambling casinos (in most states, nobody can) where people might spend a lesiurly evening gradually feeding 30 pounds of quarters into slot machines (and receive some entertainment and a few free drinks), but don’t seem to care nearly as much when a stock broker advertizes on a local TV station strongly suggesting that consumers would be wise to channel their insulin money into securities/bonds/stocks/oil leveraging/precious metals/whatever.

I have to admit, I have often been tempted to try making a quick buck on Wall Street but have no real know-how (except what I learn by looking at those TV commercials). On the other hand, I am never tempted to gamble at casinos (blackjack, slots, whatever). Clearly, gambling with the stock market seems more dangerous since you could lose many hundreds or thousands of dollars in a few hours.

Well, there is a distinction. If you feed ten dollars to a slot machine, you are purchasing a chance (or several chances) to win money. If you take that same ten dollars and buy a share of stock, you are actually buying a tangible asset that may fluctuate in value.

I guess we could argue about whether a share of stock, which simply documents a percentage ownership in a collective organization, is any more-or-less tangible than a chance to win a slot pull, but I imagine that would end up in GD.

Your premise is false. The stock market is tightly controlled and regulated by the government. The Securities and Exchange Commission is the federal organization devoted to regulating stock markets and transactions.

The government is anal about who can issue and sell stock, and has been known to be very harsh on those who violate their strict rules.

You can lose just as much money in a casino as you can in the stock market – it depends how much you bet. However, there are two key differences between the markets and casino gambling:

  1. By purchasing stock, you are investing in a company. This meanst that you are providing the company with capital to run and expand its business. In the long run, this helps to increase the size of the economy and keep it healthy. (Of course, there are various types of paper investments that don’t meet these criteria. But in general if you buy stock in a corporation, you are giving money to help that business grow.)

  2. Stock can be purchased and held. A large paper loss when the market drops does not necessarily mean that you have lost money in the long term. In fact, in the long term stocks are one of the safest investments you can make. If you diversify and select your stock purchases wisely, ultimately you will own pieces of major companies which are the foundation of the economy. If you make a big gambling bet and lose, that money is gone for good.

For the same reason why buying part ownership in a restaurant is not gambling. You are buying a share of a business. In fact I would say that owning a restaurant is a very risky proposition. Also there is a great deal of benefit to society gained by allowing businesses to raise money. Businesses provide work for people, they provide goods and services to people.

You have to try really hard to loose all you money in the stock market in a couple of hours. It is easy at a casino. And in the long run you are pretty much sure to loose all your money at the casino. You can only loose hundreds of thousands of dollars in a few hours on the stock market if you are putting in millions of dollars or are playing with some exotic and very leveraged instruments. Also for the past century money in the stock market has in general gone up at about 8% to 11% per year depending on who you talk to. So it is not to begin with the loosing proposition that casino gambling is.

If the government outlaws everything that is risky then there is not much people would be allowed to do.

If you ask me it is a form of gambling. Because the return is not certain. The odds are that you will get something back but stocks do go to zero and you get no return.

1. By purchasing stock, you are investing in a company. This meanst that you are providing the company with capital to run and expand its business. In the long run, this helps to increase the size of the economy and keep it healthy. (Of course, there are various types of paper investments that don’t meet these criteria. But in general if you buy stock in a corporation, you are giving money to help that business grow.)

From what I read on this forum this is not necessarily true. Yes, the initial stock offering goes to the company as investment but after that’s all gone you’re just buying from other investors and that money goes nowhere near the original company. I’d venture to say that the vast majority of selling and buying has nothing to do with investing in the company.

Gambling is wagering on the outcome of a competition.

Investing is venturing on the future results of a business in a competitive environment.

[sub]…hey wait a minute…[/sub]

But the same government does not seem to be as anal about protecting its citizens from being taken to the cleaners from bad market investments. On the other hand, I am well protected from possibly losing my house to a gambling casino because I’d have to travel hundreds of miles to find a legal casino.

You’re saying that one is not necessarily worse than the other. Then do you agree that the comparison has some value?

How does this differ from what I would do in a casino? Wouldn’t the money I lost there help to increase the size of the economy and keep it healthy?

Which is another way of saying that a stock in hand is an investment, not entertainment. While I agree with you on this point, I doubt that most of the people who use the phrase “play the stock market” would see it that way. These people are looking for quick money from risky bets. This is why I see little difference between “playing the stock market” and gambling.

If, if, if. If you are smart and careful and if you have a professional broker and if you read the prospectus, you might do well. But the government’s tight controls on gambling are in place to prevent stupid consumers from throwing the deeds to their homes onto a craps table (while having a little fun at the same time). The SEC is there to make sure the Big Boys play by the rules, not to protect consumers from their own greed and stupidity. I fail to see a significant distinction.

[QUOTE]
*Originally posted by Attrayant *

[QUOTE]
Originally posted by SpoilerVirgin:

Over the past decade casino gambling has expanded rapidly throughout the U.S. Although there are still some states where it is not allowed, it is now available in a large number of states through Indian casinos, riverboat gambling, and the opening of gambling in cities outside of Nevada and New Jersey. It is not the Federal government which is preventing you from gambling in your state, it is your state government (and probably the citizens of your state, since gambling referenda have been on ballots all over the place).

If you read the Wall Street Journal, you see stories daily about people losing their licenses, being shut down, and even being imprisoned for stock fraud. Sellers who do not follow market regulations are removed from the marketplace.

I’m saying that one is not worse than the other mathematically. $1000 lost in the stock market equals $1000 lost gambling. The losses do not mean the same thing, however. There are other risks and benefits which I have pointed out that make the two ways to use your money very different.

No. Money that you lost in a casino would go into the pockets of the casino owner, who might use it for any number of purposes, which might or might not enrich the economy. Money that you invest in the stock market helps to build the business infrastructure of the country by helping businesses to expand. Of course it’s a lot more complex than this. Some money is paid out in dividends, some goes to the people running the company, etc. But without a stock market, many companies would have difficulty raising capital. Without casinos…we’d have no casinos.

I will agree with this. If by “playing the market” you mean day trading, looking for the kinds of quick returns you get in a casino, doing little research and hoping for the big score, basing your stock picks on superficial trends and not the underlying soundness and growth potential of the companies in which you invest, then yes, that is gambling.

The government’s tight controls on gambling are not there to prevent stupid consumers from throwing the deeds to their homes onto a craps table. As a matter of fact, consumers are perfectly free to throw the deed to their home in the form of every cent they have, plus every cent they can borrow off of sixteen different credit cards, plus every cent they can get by pawning every single possession they own onto the craps table, and the government is not going to do anything about it. Just like the SEC, the government’s gambling regulations are there to make sure the Big Boys (in this case the casino owners) play by the rules, not to protect consumers from their own greed and stupidity. I fail to see a significant distinction between how the government regulates gambling (making sure that there is a level playing field, and then allowing consumers to bet and lose as much as they want), and how the government regulates the stock market.

The stock market serves an important economic function by providing capital to businesses. Casinos serve an unimportant function by providing entertainment. Both are tightly regulated by the government because they are easy opportunities for fraud. While I believe that there is a distinction between investment and gambling, I think that the government makes much less of a distinction than what you are implying.

I agree that some aspects of stocks (and I’ll include other non-stock issues in my post) are more gambling than investment.

Take shorting a stock. Since when is betting that a stock will go down an investment? There are also complex indexing options that in no way can be considered investments. On some exchanges you can actually bet on the weather. (Which effects crops and such.)

I don’t think the SEC is at all in effective control of the new forms of betting that have popped up in the last 20 years.
The stock (and commondity) markets should be only for long term investments in companies. No quick turn around buying and selling on fractions of points, etc. (And we can do it in cents now! The mind boggles on what this will do.) Stocks were originally intended as a way to raise money for corporations to expand business. We need to roll back to that concept.

The fact that the market indices swing so wildly is a symptom of this problem. Stocks markets shouldn’t change 6% in a day because Kabul changes hands.

Note that in the short term the stock market is intrinsically unpredictable (else we would all get rich). In my branch of Computer Science we define random as an unpredictable sequence of numbers. Ergo, it is a casino in the short term.

When you play the market like a casino you’ll have to accept casino odds.
This point has been made zillions of times since the NYSE opened. It really doesn’t need to be made again.

On the other hand if you’re willing to do some homework and invest ONLY LONG TERM MONEY you have a good opportunity down the road for a comfortable retirement, meeting college expenses and other neat things.

Prudent INVESTING in “the market” (which you can literally do through index funds–just pick which “market” you want) takes some time. I talking a minimum of 5 years here. 10 years would be better. 20 years would be even better. It seems a bit of a stretch to compare this process which may take decades to spending an evening in a casino.

Note also that the government does provide an incentive to shareholders to avoid extremely short-term ‘gambling’ on the market: the long-term capital gains tax. Tax rates are substantially lower for long-term holders of a stock. One could argue that the LTCG tax should require holding a stock for 3 or 5 years instead of one, but clearly the government treats short-term gains just like gambline proceeds and taxes them at the full rate of ordinary income.

Rick

I hereby announce the introduction of a new investment opportunity – “shares” in my football team’s earnings! Here’s how it works: Every time we win, your shares go up in value, and you can cash in at any time. Your investment will provide important capital so our business can grow and attract new talent. Plus you will be helping to build a strong economy in the process, since we employ hundreds of people at our stadium and generate much revenue for important blue chip companies, like Budweiser. And of course your earnings can provide a stable source of income for you and your loved ones. Please read our prospectus carefully before investing. Woops, if you’ll excuse me, there’s an FBI agent at the door…

In all seriousness, the reason stocks aren’t considered gambling is because the people who make the laws are intimately involved with corporations/stocks. Gambling afficianados simply don’t have enough influence in government.

The irony of states disallowing gambling is, of course, the fact that they themselves run lotteries… another form of “investing”.


“A wise government shall restrain men from injuring one another but leave them otherwise free to regulate their own pursuits.” – Thomas Jefferson

I understand you disapprove of the kind of financial transactions you mention. Maybe it’s because you feel that this activity is “unproductive”. But it helps to provide liquidity for traded stocks and to arbitrage out any anomalies. This liquidity is very important for companies trying to raise funds, and it’s one of the benefits of your stock being traded on the NYSE rather than among a group of your friends. So you think the market over-reacts to world events? There you go; plenty of chances for you to get rich.

Life is a gamble. Every day I have to decide whether to go to work. If I don’t, I don’t make any money and will eventually starve to death. If I do, I have to drive there (and, no, there’s no public transportation to get there), and there’s a chance I’ll be killed in an auto accident. And it’s not an insignificant risk. Remember, every year 40,000 or so Americans are killed in auto accidents, so about 1 out of 92 Americans die in auto accidents.

These are all superficial comparisons. Gambling, investing in the stock market, driving to work - they all involve risk. So what?

Investing isn’t considered gambling for the same reason that bourbon is legal and marijuana is not. The guys who made the rules drank bourbon and ran the market.

[sub]For the humor impaired, the above is obviously an exaggeration presented as a devil’s advocate argument. Personally, I agree with SpoilerVirgin et al. Don’t bother to flame empty space.[/sub]

A co-worker and I used to debate this very question.

He liked to play the stock market, and I liked to play the horses at the local track. In each case, we would do the following to decide on our investments and maximize our profits:

– Read the daily papers for the stock tables or the racing reports.

– Read specialized publications dealing with our respective interests (he’d read a stock publication; I would read the Daily Racing Form). We were each basically looking at past performances.

– Discuss our prospective selections with others like us.

– Accept or decline tips from those more in the know (stockbrokers or handicappers).

But while he would concede that we each used the same methods to make our selections, he stopped short of saying he was gambling in the same sense that I was. Rather, he was buying into an investment that may result in his investment capital growing. Of course, he may not realize what he is hoping for, or he may also lose it all, but it is an investment, and liable to risk.

My reply was generally, "I’m buying into a share on a horse. The pari-mutuel method of wagering ensures that if that horse wins, I get a share of the pool wagered on that horse. Of course, I may not realize what I’m hoping for, since the odds change, or I may lose it all if the horse loses, but it is a wager, and liable to risk.

He would say that he was buying into the investment over time. It may fluctuate over time.

I’d say that my wager fluctuated over time too. A shorter time than his, certainly, but fluctuation over time nonetheless. (For those of you who don’t know, the tote odds change as wagers are placed–the more money that backs a certain horse in relation to other horses lowers the odds on the certain horse. I can buy a tote ticket at one set of odds, but those odds can and probably will change between the time I buy my ticket and the time the winner is decided.)

He could sell his stock anytime, if he could find a buyer. At a profit, preferably. I could sell my ticket anytime–to anybody who didn’t feel like fighting the lines at the tote windows. For more than I paid for it, if it backed a prospective longshot.

The only difference that I could see (and that I would concede) is that my investment would be decided at a certain time. His wouldn’t be, at least not in the sense that mine would.

Note that I’m only looking at this from an investor’s point-of-view–that is, the decision one makes to invest in either stocks or horses, and the decision about which stock or horse to back. I’m not looking at where the money goes after the investment has been made (in his case, to the company he’s invested in; in mine, to other bettors if I lose).

I see a lot of references to casino gambling in this thread, but I don’t think casino gambling is really a good comparison to stock market investing. In casino gambling, the odds are set, and the outcome cannot generally be predicted based on past performance. In horse racing, you can look at past performance and daily conditions, and make an educated guess at who will win–and in the stock market, you can do the same.

Maybe this is more my humble opinion than an answer to a GQ, but given what I’ve stated above, I believe that playing the stock market is pretty much the same as gambling on horse racing. Except that playing the market is seen as more respectable.

One thing most people don’t notice about the stock market is that when you buy stock you are buying because you think the market is going up–yet, on the other side is someone who thinks that the market is going to drop–they are selling. A little ironic…

I think of the stock market as ‘gambling’ in the form of a noun–to do something that has a form of risk; horses, etc, are gambling as a verb-- playing a game of chance.

This post seems to be the one closest to my own views. I have not seen anyone comment on it.

In what way does a stock purchase constitute an investment in the company? The company will NOT stand a better chance of making a profit simply because I bought their stock. I am simply taking the place of the person who I bought the stock from.

But there seems to be another factor which has not been mentioned: Dividends. Having bought the stock, I am now a partial owner, and when the company earns money, I get a share of it. (No pun intended, that’s what “share” means in this context: a share of the ownership, for better or worse.) Stock prices go up when people think that think that the company will produce significant profits, and prices go down when people think the company is in trouble.

Trouble is, that’s how it ought to work, but it’s not how it does work.

There are a lot of companies who don’t pay dividends at all. But I suppose you could say that the price goes up on the hopes that they will pay dividends soon.

The bigger problem is that most “investors” pay little or no attention to the dividends. (Some do, but most don’t.) Instead of basing their buy/sell decisions on whether the company is showing a profit, they choose to buy or sell based on what they think the stock will be worth tomorrow, or next week, or next year. That’s why I percieve the stock market to be gambling — because the vast majority of price fluctuations are caused by the fickleness of the consumer, rather than the value of the product.