Should You Gamble or Invest in Stocks?

12/05/2017

Sports betting has grown dramatically with the advent of the internet age and, now, more and more bettors are becoming interested in the potential of shares to generate financial profits. Here's a quick guide to whether you should consider dealing in shares – and whether you should view it as a gamble or an investment!

Share Essentials for Dummies

When you purchase a share, you technically become part of the company (eg. if you buy a Coca Cola share, you become part of one of the world's biggest drinks brands). Incidentally, a share in Coca Cola currently costs around 45 US dollars (as of December 2017). The goal of purchasing a share is to hold it until its value rises enough that selling it would make a good return on your investment.

For example, if you bought 100 Coca Cola shares in December 2016, you'd have paid approximately $40 per share (an outlay of $4000). At the end of November 2017, the share price had risen to roughly $46; selling at this point would have yielded a profit of $600 (15% capital growth), before any commission.

It's also important to make a distinction between traditional share trading, in which an investor looks to hold shares for several months or even years, versus a short-term trader who looks to trade shares for short-term returns (e.g. daily, weekly or monthly). Both forms of trading can be profitable to smart traders. Day trading is very popular among those with small amounts of capital, since it can be leveraged for potentially quick gains.

For example, you could have a $1000 share trading fund and look to make 1% a day in profits (over time making excellent returns). Any commission paid on share deals also needs to be taken into account when analysing profits, although they're generally small.

Compounding: The Key to Making Money on Shares

The secret to building wealth through share trading is to understand what Warren Buffet calls 'little snowballs'. In fact, many refer to him as 'The Snowball' thanks to this theory. Buffet talks about the concept of 'compound interest' – a tiny snowball gets bigger very slowly, gaining a few percent of its size each time it's rolled. With time, the impact of percentage gains becomes literally incredible.

For example, if a share dealer grows $500 by 20% a month for a year, they'll end up with approximately $4,500 – but if they sustain it for four years, they'd have around $3,000,000. This figure is merely illustrative, as it's aggressive and potentially unsustainable when dealing with very significant sums of money. However, it demonstrates the snowballing effect and the power of professional investing. With a gambling mentality, you'd quite possibly quit after a few weeks, thinking it was a slow return.

These numbers shouldn't make share dealing sound like an easy option to getting rich, because it takes the development of high-level skill and discipline to achieve anything close to this type of success. But it is possible, with time, knowledge and persistence.

Share Dealing – Gambling or Investing?

If you're interested in share dealing, then it's essential to view it as an investment opportunity, not a gamble. The aim of share dealing, be it day trading or long-term interest in a company, is to take measured, well-researched risks, while protecting capital. As noted above, the impact of seemingly small gains in capital over time is the secret to success.

Naturally, this means different things for different people – your financial goal could be to make a modest second income, pay off your mortgage in five years or become a millionaire over the course of ten years. While talk of making thousands and potentially millions is naturally appealing to the gambling mind, it's crucial to ask yourself if you have the discipline and mindset to invest and think long term.

Consider this basic outline:

  1. Start out with a careful budget (ie. money you can afford to lose)
  2. Focus on the process of making a small, consistent percentage on your capital
  3. Aim to progress your dealing skill progressively over time
  4. Don't take huge risks on one share
  5. Learn to use stop loss limits and live by investing rules
  6. Remember that a small profit percentage generates long-term wealth
  7. Consider investing in penny shares to keep expenditure low while learning

One key to successful share trading is to start out with humility and acknowledge that to succeed you'll need to begin slowly, learn from mistakes, read and learn about shares and constantly evolve your skill. The other option is to take advice from reputable stock broking companies, sign up for trading tip newsletters, or invest in a managed account service.

Taking the plunge into share investing can lead to financial success over the long term. What's more, it is possible for everyday people to achieve impressive results. However, the key is to focus on becoming an investor – and that requires learning, discipline and constant research into the business world.