Is The Stock Market Gambling?

This is a question people just starting out in the stock market may ask. The stock market for dummies could seem like gambling when you pick your first losing stock. So, what is the difference is between gambling and the stock market.

Sometimes it may seem that you can lose just as easily at the stock market as you can at the blackjack table. Ask anyone who has lost money in Enron how they felt after their stock went to zero. You can lose big on a stock but rarely do companies go bankrupt and the stock go to zero.

The difference between pure gambling and buying stocks of companies is that you are betting on the future of the company and you have a track record you can research. If you are invested in many stocks, you might say that you are invested in the future of the country. If something terrible happens to the country, like a natural disaster or a terrorist attack, stocks will go down. If the country flourishes and good times prevail, the stock market will most likely go up. By investing in the stock market you might say that you are betting on our future.

Gambling in a casino is a whole different scenario. There is no casino game that the player has an edge. Just take a look at how big Las Vegas has become to be sure that the house always has the advantage. You might be able to beat the house now and again but over the long run you will lose.

When you buy a stock and it immediately goes down, it might sometimes feel like you are gambling but that is mostly out of frustration. If you do your homework and pick your stocks carefully, you should be able to make money long term in the stock market. The stock market for beginners is a much better place to be "betting" your money than the casinos.

Stock Prices and Perceived Value

One of the hardest concepts of the stock market for dummies to grasp is what determines the value of a stock. When you buy a stock, you are buying a part of a company. However, that stock price can go up and down drastically sometimes for almost no reason which in turn means the value of the company is going up and down as well.

Lets say you bought some shares of the stock Garmin in the last six months. If you were unlucky and bought it at its high, you might have paid as much as $125.00 and change. Unfortunately if you look at the stock price today, you will see that the price is down to around $43.00. That is a decline of almost two thirds! Wow! This also means that the value of the company went down two thirds as well.

What happened? How can a company be worth only 33% of what it was just5 months ago? Is the company really in that much trouble? Did a hurricane destroy a factory or two? Well, in Garmin's case it is all because the perceived value of the company went down. GPS devices have been very hot for the last 3 years or so and the stock went up steadily because of the perception that Garmin was the industry leader and would sell a lot of units.

Suddenly, with the economy on the downturn and people not spending as much as they did for expendable items, the perception is that Garmin will not sell as many units in the coming years. The company is still doing well right now but everyone believes that things will change. Thus, just because people THINK things might change, the stock goes down and so does the value of the company. The perceived value of the company has gone down.

Stocks can shoot up for the opposite reason when people think a company is in the sweet spot and has a product or technology that will do very well in the future. In that case, the company stock may go through the roof even though they have few sales at this very moment.

Stock prices go up and down daily on what stock market investors perceive the value to be and not necessarily what the company is really worth. It is difficult to fathom this sometimes because you have to change the way you think about investing in stocks. This is another thing that shows that the stock market for beginners is a complicated beast to learn.