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Posted by on Oct 7, 2011 | 0 comments

Stock – Investment or Gambling?

Stock – Investment or Gambling?

The reason I am writing this article is that many Christians debates whether stock trade is a gambling or not.

Before we can decide we need to understand what stock is.

The definition:

Stock is a security issued in the form of shares that represent ownership interests in a company

Owning a stock meaning we are part of the company because we invest our money to the company with hope, a long the time the value of the company grows and in the same time our money grows.

To understand better we need to understand how it begins at first. Here’s interesting example taken from investopedia:

A Business Is Created
Jack is a farmer, and he is interested in starting up an apple stand for the tourists who pass his place. Since Jack has fairly good credit, he got a business loan to cover the costs of set up, and he now has the ideal land for apple growing. Unfortunately Jack only set aside enough money for getting his land in shape. He forgot all about buying seeds. By a stroke of luck, Jack finds a store that will sell him a magic high-growth, high-yield seed for $100, but Jack only has $50 left.

The Initial Public Offering to Raise Capital for Growth
Our clever farmer goes to five of his closest friends (you’re included) and asks if they’ll each give him $10 to help his business. However, Jack doesn’t know if he can take it in the form of a loan because he may not be able to pay it back if the seed doesn’t turn a profit. No worries: Jack promises everyone they’ll receive a percentage of the tree’s apples that is equal to the percentage they gave. In other words, Jack has given his friends a share in his tree. They agree and the seed is in the ground before you can sing “Johnny Appleseed”.

The Distinction Between Being a Partner and Being a Shareholder
This tree, being magic and all, grows rapidly. In the first month, it is five feet tall and there are two apples. Jack keeps one apple because he owns 50% of the business’s product, which he paid for with the $50 dollars he put in for the seed. He cuts the other one into five pieces, each of which goes to each of his investors, who can sell or eat it. The investors have a quick meeting and decide they’d rather have Jack sell their portion of the product and give them a percentage of the profit. So Jack makes up little papers saying, “Jack’s Apple Company: you have one share guaranteeing you 10% (10/100) of the profits.”

Trading Occurs in Jack’s Undervalued Stock
So this tree really takes off now – the magic is coursing through the wood and it grows to 10 feet tall! There are 20 apples and Jack sells them all for $10 a piece, keeping $100 for himself and giving his friends $20 each. Jack uses his $100 to buy another seed and plants it. Pretty soon, Jack has two trees producing 40 apples and earning $400 a month.

Some of his neighbors want in on the deal Jack gave his friends, and Tim, Jack’s first investor, is interested in selling his 10% of Jack’s Apple Company. Judy, Jack’s neighbor, wants to buy it and she offers Tim the $10 that he originally paid. However, Tim is not stupid: he realizes that this share is producing $40 a month and Jack is about to buy another seed. So Tim asks for $40 dollars and Judy snaps up the share, which pays for itself immediately.

A Bit of a Bubble Forms
The other original shareholders see how much Tim got and want to sell too, and the other neighbors notice how quickly Judy’s investment paid off so they really want to buy in. The offers steadily climb until Jack’s shares are being bought for over $100 a piece – more than Jack’s trees are producing in a month. Only one original shareholder, Betty, is still in there and holding out on offers like $120 because she is still getting a regular payment that is pure profit for her. Suddenly, Jack’s trees (four in total) are ravaged by aphids. The entire month’s production is ruined and several shareholders are wondering if they can pay rent since they used their savings to buy shares.

The Bubble Bursts
The shareholders that need the money sell to Betty at a discount ($40), and then the other shareholders notice, all of a sudden, that their $100 shares are worth $40. This is very disconcerting. The remaining shareholders offer their shares to Betty, but she says she’s quite content with three shares. The other shareholders are desperate now, so when the town sheriff offers them $20 a piece for the shares, they take their losses and get out.

Meanwhile, the main drive of Jack’s business hasn’t changed: people still want apples.

What Did We Learn?
This story will not explain everything about investing in stocks, but it does highlight one very important point: the price of Jack’s stock followed investors’ opinion of the stock’s value rather than just the performance of Jack’s company. Because the stock market is an auction, there is no set price for a certain stock, there is a concept that derails most people’s trains of thought: the price paid for a stock is what it’s “worth” until a lower or higher price is offered.

This fluctuation of worth is good and bad for investors because it allows for profit (when you buy an undervalued stock) but also makes losses possible (when you pay too much for a stock).

Source: http://www.investopedia.com/articles/basics/03/062703.asp#axzz1a5H3Eyp1

Going deeper – Is day trade is gambling?

Day trading is buying and selling the same underlying stock in the same day. Tell me, why do you expect from your investment when you own (buy their shares means own them) a company and sell it within a few seconds, minutes, hours?

Rightfully, there should be no higher return expected as it’s only few hours.

Day traders use technical analysis from the chart graph (moving average, support-resistance analysis, MACD, stochastic, etc) to decide when to buy and sell.

Technical analysis uses the past chart (minutes, hours, days), to predict chance in the future. Is it wrong? Well, it’s not. Like if you see the sky is dark, with lot of winds, we bring umbrella as based on our past experience, we predict the future that it’s gonna rain.

Now move backwards and see how this all linked; Stock means ownership of a company, technical analysis is predicting chance in future based on the past. In this case, how can you own a company, and expect it to give return in near future (within minutes or  hours, daily charts not included as the scope is day trading) based on a graph? That’s gambling mentality.

Fixing Mentality

If you follow the story carefully, owning and trading stocks is not gambling. People say it’s gambling because they don’t know what they buy and sell and the price when they buy and sell. And when people spend their money with expectancy of higher return without knowing what they really do, which means depends on their luck, that is what I call gambling mentality.

When we buy/sell (trade stocks) without understanding that it means ownership and being part of that company. That’s gambling mentality.

If you notice, I use the always use term ‘gambling mentality. What makes stock trade is gambling is the mentality to get rich quick while not knowing anything (all depends on luck) about what they are doing.

Proverbs 28:22 (KJV)

A greedy person tries to get rich quick, but it only leads to poverty.

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