The Difference Between Speculation and Gambling
Four good reasons why the stock market is not a gambling den...by Deena Mehta
In India, stock markets are often associated with gambling. In many cities, the lane where the futures markets—stocks and commodities—are located is called satta bazaar , and those associated with it are labelled as gamblers. So it's not surprising that in a country of nearly 100-crore population, slightly more than 2 million people participate in secondary markets and about 30 million hold shares. Even today, many belonging to the older generation usually offer cautionary words of advice to those in the younger generation who are keen to dabble in stocks and shares.
But is this cautionary advice justified? Before answering the question, let us understand the difference between gambling and speculation.
Some of the popular avenues for gambling are betting on cricket, football or horse racing, on the outcome of an event (such as a lottery, casino games), or a simple toss of a coin. These events, by themselves, do not carry a risk element. For example, cricket is a sport that will be enjoyed irrespective of who wins. At best, if the home team loses, the crowd may get disappointed. A spectator will not lose money, merely watching the game. But if he bets on the result of the game by wagering his money, a risk element gets created. So, there is no risk per se with the event, but betting imputes the risk.
Given below are some typical apprehensions that people have about share investments and my view on why they are thinking wrong .
Apprehension No. 1: RISK
When we have cash, there is always risk—of devaluation due to inflation if we keep the cash idle, of it being stolen or spent by near and dear ones, of investing in low-return options (which we term `loss of opportunity'). Hence, by investing the cash, we are trying to minimise the risk already present and get a higher return by identifying better-income avenues. There is no creation of risk.
Apprehension No. 2: VOLATILITY
The volatility in the markets is also a reason cited for regarding shares as an unreliable form of investment. People point out that markets fluctuate every day, and their ignorance of the market-movement and fear of loss of capital holds them back. But volatility should be looked upon as an opportunity. If the market is not volatile, there would be no opportunity to make money. When the market goes up, it presents the opportunity to sell, and when it comes down, the opportunity to buy.
Apprehension No. 3: LOSS
Investors have another favourite argument: I buy high and sell low and lose money all the time. In order to make money on the market, there has to be a long-term engagement with the stock markets. Typically, people who say that they bought high and sold low are those who enter the market at the peak of a bull run because they feel left out when the momentum is building up. Soon after the market takes a dip (or a plunge), they are left with high-priced stocks. Their patience runs out and they dispose of their scrips at whatever price they get and take sanyas from share investment. Moral: It is necessary to be constantly in touch with the markets to understand their ups and downs and ride the wave to make money.
Apprehension No. 4: UNPREDICTABILITY
Disillusioned investors like to say the markets are unpredictable because of operator activity and price rigging, a characteristic of gambling. But they should understand that there are going to be undesirable elements in every market. We have to define our area of operation and guard ourselves against such risks. This can be done by restricting our activity to A and B1 group stocks only. These are highly liquid stocks and not prone to manipulation. Low capital and T2T category items have a higher probability of price increase, along with the appended risk of them being prone to price manipulation. These shares have a low capital base; hence, it takes very little cash to rig the prices in the desired direction. After every bull run, investors are stranded with stocks that have no liquidity, company addresses that are untraceable and other allied reasons that render the share worthless. This happens because stocks are not bought on merit but on rumours of operator activity. By defining exit levels (in terms of desired returns) and stop loss levels, an investor can guard against steep capital depreciation.
To conclude, financial planning is a must for every family. It involves building up a portfolio of investments in various instruments that not only meet your needs of cash liquidity but also acts as an earning partner. We mistakenly assume that we are the sole earning members of the family while ignoring the contribution that wise investments can make in sharing the load. A little time devoted to financial planning can reduce the burden multifold. Understanding the suitability of each avenue in the right perspective can go a long way in enhancing the returns on your portfolio.
Source: BW
