Is the stock market a game of chance?

Shares - Investment or Gambling?

But the truth is: whether investing in stocks is a serious investment or a game of chance depends to a large extent on whether you are familiar with it and what type of investor you are.

Namely, there are the following types of investors. In total I come to 5 groups:

  • Group 1: Investors who are knowledgeable about stocks and who invest in stocks. And then make good, solid profits.
  • Group 2 to 5: Investors who are unfamiliar with stocks. These are divided into the following groups:
    • Group 2 and 3: Investors who don't know about stocks but think they might.
    • Group 4 and 5: Investors who don't know about stocks but know it.

Let's take a look at the investor groups one by one

Group 1: This group is in the minority in Germany and usually also has shares in its portfolio. Since these people know what a stock is, how stock exchanges work, how to rate companies, and how to apply an investment strategy, these people also make a profit from their investments.

All the following groups now have in common that they are unfamiliar with stocks.

People of Group 2 but think they know. Since they know that you can lose money on the stock exchange and that the “big ones” only gamble on the stock exchange and that the taxpayers have to bear the losses in the end, they are of the opinion: stocks are not for investors and the whole thing belongs best forbidden!

Also people of Group 3 think they would know their way around, because they learned from YouTube videos how easy it is to get the big money. It's really easy. You buy stocks when prices are low and sell when prices are high. Analyze the value of a company? Much too complicated, and besides, you were never good at math. In reality, this group of people does not “invest” their money much differently than in the casino (only that in the economy the chances of winning are slightly higher than in gambling). This group believes that stocks can get you rich quick.

People of Group 4 know that you have no idea about the planning and therefore do not buy stocks.

And people of the Group 5 hire an investment advisor for the same reason, but this is not always the yellow of the egg.

As an ex-banker, I like groups 1 and 4 the most (as an active banker, of course, I would prefer group 5). All other groups act completely irrationally with regard to stocks and lose a lot of money in some cases.

Now it is actually the case that one can consider buying stocks Gambling can operate. Namely then, if you just buy blindly. Then prices either go up or go down. You get the right entry point or you don't. Just gambling. Just with much better chances.

But you can also analyze companies beforehand. In this way you can determine whether the company's shares are cheap or expensive. I will explain in more detail how this works in another article. In any case you have to know, of course, how something like this workswhere to get the information you need. And then of course this also means a lot of effort.

Or you hire someone who is familiar with something like that. I said something about investment advisors earlier. It's always that kind of thing. You can never be sure whether his recommendations are good for his or my wallet.

Invest when you have little idea

However, there is now the option of investing in a fund (no, not in a fund - only cooks work with that). A stock fund works like this: many investors put money into one pot and professionals use it to buy stocks. This has two advantages:

- First, the money is invested by professionals
- Second, the risk is spread across several stocks

The first advantage cannot be denied, but it also has a serious disadvantage: the administration fee. The professional doesn't do the whole thing out of charity. And so a certain percentage is withheld from the fund assets year after year (together with the performance fee, an average of 1.6% is often reached - every year).

The second benefit is the spread of risk. If you put everything on one card, you can win a lot if things go well. On the other hand, you can also lose a lot. If you have spread your money, then the risk is also limited. A single company can go bankrupt - but all of them together? If this happens, then it's over anyway - and then it doesn't matter how you invested your money.

As I said before: the disadvantage is that the fund companies are of course well paid for the service. However, there are now index funds (sometimes these are also called ETFs, with index funds mostly being ETFs, but an ETF is not always an index fund). With their deposits, index funds replicate a certain share index, e.g. the DAX. Since companies from various industries are represented in the DAX, the risk is then automatically spread.

The difference to a normal equity fund is that it makes almost no work for the fund company to invest in the companies of the relevant index. Thus, the management fee is extremely low (it ranges from 0.05% to 0.75% per year).

So this would be my recommendation for people who have no idea about stocks but still want to benefit from the performance of public companies.

How to minimize the risk

Now that we've eliminated one risk factor (not putting everything on one card), let's turn to another risk - timing.

In retrospect, everything is always so clear: If you had bought at the bottom and sold at the top, you would have bagged an extreme profit. But in reality things are not that simple. Because: how do you actually know whether you have now bottomed out? How do you know later that the summit has now been reached? These are just things that you cannot know in advance. This means that you can practically never know the best time to buy / sell.

Therefore, there is always a certain risk associated with investing a certain amount on a one-off basis. No matter what you do, it can always be wrong.

Regular purchases of shares have the advantage that, in retrospect, the shares have been acquired at an average. And even better: if you invest the same amounts over and over again, you will find that more shares were bought at lower costs than at higher costs. This effect is called Average cost effect. Here is a small example with amounts that are pulled by the hair but easy to understand:

Someone is investing 1000 euros in shares:

  • the first time the price is 50 euros. So he buys 20 shares.
  • the second time the kus is 100 euros. So he buys 10 shares.

At first glance, one could assume that the average purchase price would be 75 euros. But far from it.

That certain someone spent 2,000 euros and received 30 shares in return. So he spent 66.67 euros per share - not 75 euros. A little difference, right?

However, this effect only occurs if you buy shares on a regular basis.

Precisely because stock markets are always fluctuating, this is a strategy that largely minimizes risk. You buy stocks when they are cheap, you buy stocks when they are expensive, and in between.

So you can almost completely eliminate the risk by

  • spreads his amounts, so don't put everything on one card.
  • regularly buys stocks.

When the internet bubble burst

I saw the new market euphoria myself at the end of the 1990s. Where companies went public and investors threw the money after them. A company just had to say “we're doing something with the Internet” and the investors were immediately hooked. Nobody was interested in what the company wanted to make profit with.

At the time, prices actually rose dramatically (especially at the we-do-something-with-Internet companies). And that over several months and years. And who bought stocks how stupid? They were group 3 people.

Group 1 people looked at the companies and bought them specifically.

The Neuer Markt then collapsed faster in 2000 than a bursting balloon in fast motion. What has remained, however, is the Internet and companies that really had something to offer.

The serious, boring companies that were listed in the DAX also suffered from the crash, but were subsequently able to recover. From today's perspective, you could even have entered at the peak and would still be clearly in the plus today. (Note: Index funds have only been allowed in Germany since 1998, so earlier you would have had to spread your risk with normal, expensive equity funds).

Therefore: spread risk - Don't put everything on one card and invest amounts regularly. Then it works with shares too.

Nevertheless, you should always have a small buffer in the form of fixed-term / overnight money. Not that in an emergency you have to sell stocks when it's time to buy.

Now I have written how one can largely eliminate the risk in stocks. However, it is still not clear whether it is a question of gambling or an investment.

How gambling works - and how it differs from buying stocks

In a game of chance, you give someone money, who then keeps something and pays out the rest. With the lottery, only 50% is paid out again from the start. The lottery company keeps the remaining 50%.

When it comes to shares, you give your money to whom? The corporation? No. OK, yes, with an IPO, but normally you buy shares on the stock exchange. That is, you buy the stock from someone who previously owned that stock. So for your money you get shares, that is, shares in a company. This means that you are also entitled to the company's profit. And the more profits a company makes, the more people want to participate, which then increases the price on the stock market (supply and demand).

In games of chance, chance decides whether you get something paid out. When it comes to stocks, the company's success decides, which has little to do with chance. Otherwise it would be a gamble if a bank gave an optician a loan so that he could open his shop.

Interestingly, most of the time, people who think companies are making more and more money (which is true) also think that stocks are a game of chance. However, both views are mutually exclusive. If companies keep making more money, would it be a must to buy shares in it?

Of course there is always a residual risk. A company can go bankrupt. Just like an employee can be fired. Just as a fully educated person can be unemployed. But that has nothing to do with gambling, does it?

Now your opinion is asked: what do you think of stocks? Which group would you belong to?

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1 comment

Now it's your turn. What is your opinion on the subject?