Thinking out loud- gambling and the stock market

[prosper]

besides the risk comparison, is there really a huge difference between gambling and participating in the stock market.

For example, If you are speculating and sell the market short, you are betting that prices on a particular equity or debt will be cheaper in the future. Slot machines( stocks) are riskier than say playing blackjack ( bonds) at the table. In the world of finance, you could use financial instruments such as bonds and foward contracts to hedge against risky speculating or higher foreign exchange rates . Im not a big gambler but I am sure there are various ways to decrease the level of risk in a casino. For example, if you are in a casino all day and you watched a guy play and use only one slot machine, ( assuming he hasn't won all day) that is a way to hedge because a certain amount of risk and loss has already been consumed.

Just thinking out loud; not suggesting that investors include gambling in their portfolio. I'm just wondering if you all think gambling is really that different from the financial markets exlcuding the level of risk.

As a matter of fact, would it be ideal to allocate .00001 of your portfolio to lottery tickets. ( small loss, big profit potential)

[sweeps]

Everything we do is a gamble at some level. You have to balance out the potential risks with the potential rewards. I bristle at the comparison between slot machines and stocks. Sure, both have risk, but you know that slot machines are rigged against you over the long haul. Stocks have historically been shown to be winners over the long haul.

[jIM_Ohio]

Not the same thing at all. Risks are totally different.

You only lose money when you SELL a stock.
In vegas, you lost the money the moment you put it on table and the only way to get it back is if you WIN. So vegas its about winning and losing, and when you lose you have NOTHING.

With stocks or bonds, you always have something unless companies go bankrupt or out of business. Even if market tanks 50%, you still have shares, which are worth 50% of what you paid for them. You have not lost anything unless you liquidate the shares (SELL).

Statisically speaking, you can make 8-12% per year on average in stock market. When market drops, you still have the same exact numbers of shares you did before the drop.
Statistically speaking, you will lose all your money you gamble more often than not. When you win it's bigger than 12% (like 25%, 50% or more). When you lose money you have no way to get it back unless you have more liquid cash from another source.

Measure in terms of risk and reward. Gambling and investing are NOT the same thing.

[disneysteve]

Being a blackjack player, let me add my thoughts.

Slot machines are completely and totally random. There is nothing at all that anyone can do to influence the outcome of each spin, and each spin is an independent event not affected in any way by the preceeding spins. The odds are pre-established by the programming of the machine to give the casino an advantage of up to 15% (that is the legal limit here in NJ). Most average about an 8% house advantage. So the game is rigged against the player quite significantly.

Stocks aren't like that at all. The company has inherent value. That price of the stock can be influenced by many factors such as sales, cost of raw materials, success or failure of new products, safety concerns, overall economic conditions, etc. A great deal of research goes into trying to determine which companies have positive prospects for growth. There is ino such thing with slot machines. There is nothing to study, no way to know which machine is about to pay off. Although market performance might sometimes seem random, it really isn't. There are all kinds of fundamentals and data that move the market up or down. And, as noted, long term stocks have a good track record of going up in value as a whole (though individual stocks may go down).

Blackjack is a little different. Unlike slots, the outcome is not random and the results of one hand are influenced by the results of prior hands. Blackjack is the only game in the casino at which the player can gain a statistical advantage over the house if he knows what he's doing. It still can't be compared to investing in the market, stocks or bonds, but it does differ significantly from slots.