Gambling in the Stock Market - Essay Example

?Introduction Stock market started over 200 years ago in the United s of America. This came to existence as the colonial governments attempted to raise finances to fund war activities by selling bonds and government notes, which were to be paid in future with a profit. Private Banks followed suit to raise capital to finance their fixed and working capital. Stock markets covers penny stocks, index investing, futures, trade options, commodities, new stock offering as well as government and corporate bonds among others. In 1792, the New York Stock Exchange (NYSE) was established when four large merchants came together. NYSE was used as a platform to trade bonds and stocks. Following the establishment of stock and bond trading platforms, most people view it as a money tree, which creates wealth easy and quick. As a result, many people used their savings to invest in stocks and bonds. However, it is important to note that investing in stock market requires hard work and adequate research because it is unforgiving for amateurs or gamblers. Gambling in the Stock Exchange There are clear distinctions between gambling and investing in the stock exchange as indicated below. Gambling refers to putting money or other valuable assets into activities whose outcome involves chance. It can also refer to an immediate event or act, whose motive is immediate gratification. When the word gambling is mentioned, people easily identify casinos, gaming activities as well as lottery. However, they fail to identify that putting money into the stock exchange to buy stocks, bonds and other investment vehicles with no concrete and clear goal may also qualify as gambling. Gambling in the stock exchange is not a new phenomenon among many new traders. Gambling can be addictive and destructive at the same time. Gamblers are risk seekers because they go for all or nothing. It is motivated by compulsion or entertainment. Little or no research, risk seeking, unsystematic approach, emotion like greed and fear is evident, motivated by entertainment or compulsion. Gambling is encouraged by introduction of internet enabled online trading making it cheaper and quicker to trade in the markets as well as easier and pleasant access to the market, which is provided by stock tickers and comfortable rooms. Investing in the stock exchange is characterized by long time investment horizon. It is a progressive process aimed at generating progressive net worth. With longer time, the value of stocks bought is likely to appreciate thus enabling long time investors to have higher chances of generating positive results in the market. Investment also involves putting money to purchase assets used to produce goods or services or spending in activities that promotes production of goods or services with an aim of making a profit. Therefore, investment involves provision of capital to companies which need to accomplish their goals. In addition, investment is about setting goals of building wealth in the future. Investors are usually risk averse as they try as much as possible to avoid risk unless they will be adequately compensated. Finally, investment is about risk aversion, systematic approach and is done after doing sufficient research. Who Gambles and Who Invests A person who invests in the long time horizon is an investor. Over time the value of the stock market is likely to increase, thus odds work in the favor of the investor. This indicates that the investor may lose money in the short term but gain in a longer time. Furthermore, in the stock market the outcome is not random. If a person takes a deliberate step to research, and analyzes which stock to buy as well as develop a detailed plan and takes a much longer time horizon, then he or she is said to be an investor because he or she has better chances of succeeding or getting positive results. Doak (45) asserts that real investors invest after a rigorous research, they form their own opinions. Investors know and understand that well run companies will have the value of their stock rise while poorly run companies will have the value of their stock fall. Thus they know that it is possible to succeed by choosing the right companies. For a long time investor, there is no end to investments because if the price falls, an investor has hope that it would result to positive results. According to Fields (18), most gamblers are attracted by mind appealing advertisements of stories of people who got rich quickly and easily. If a person picks stocks for no concrete reason or if they constantly jump from one stock to another then a person could be said to be gambling. Gamblers’ results are normally based on pure chance and odds of losing are the same no matter the number a person picks. Therefore, they may win in the short run but certainly loose in the long run. They are spurred into action by rumors and simple advertisement of how people get rich quick and easy as stated by Fields (18). Most traders who specialize in trading in penny stocks, commodities, option index or buying securities on margins are more likely to be stock exchange gamblers. Such traders are referred to as short term traders or day traders. The day traders are normally influenced by euphoria of rapidly rising or falling prices and swayed by rumors, mass panic and press releases. As a result they are more likely to act and lose in the short run because stocks are easily buoyed or battered by the name factors, but only for a short while. Commodities and option index allows riskier actions and thus appeals most to stock exchange gamblers. What are the effects of gambling in the stock market on our society? There are a number of negative effects of gambling in the stock market to the society. This is because as gambling in the stock exchange escalates, other activities of the individual gambler become constricted. First, it can lead to social crimes. In most cases short term investors are more likely to lose and when they become desperate, they may resort to criminal activities such as theft, fraud and embezzlement to fund their trading activities. This is likely to happen after the gamblers have borrowed from their banks or family members or colleagues at work to meet their gambling needs or recapture their losses in the market and they fail. Secondly, it can lead to family problems. Stock exchange gamblers normally spend too much time on the trading screen seeking for short term gains. As a result, they weaken their interpersonal communication and interaction with his or her family members or even friends or other members of the society. In addition, they become detached from communication and interaction with others. They also become isolated as they get encapsulated in their preoccupation with thoughts of the next trading session. This may create arguments and misunderstandings. They start making excuses and become more secretive in their activities as they try to hide losses they make in the stock market. Furthermore, leisure activities diminish significantly and they could not do what they like most. They may start to lie, or fail to meet certain obligations thus causing marital friction and disharmony in the family and social realms. The bad attitudes, repeated deceit and broken promises are likely to undermine sense of trust of people towards the gamblers. Finally, gamblers become neglectful, irrational, bad-tempered and irresponsible. This may become detrimental to people close to them. Third, gambling in the stock market can lead to psychological problems to the gambler. The gambling in the stock market may make a person to make losses in the short time. Consequently, this is likely to lead to stress, anxiety and insomnia. If stress, anxiety and insomnia persists it can eventually depression. Fourth, gambling in the stock market can lead to physical problems to the gambler. When the gambler spend too much time watching the trading screen, he or she may suffer from headaches, neck or back pain, high blood pressure, digestive problems or gastric problems. As a result, they fail to live normal and enjoy their lives as they should. In addition, gamblers spend so much time on the screen thus may disrupt their eating time. They may also have insufficient exercises and unbalanced working hours. Fifth, gambling can reduce productivity. Employees who gamble in the stock exchange may have their working hours disrupted because they are likely to lose their hours following the stock trends thus may lead to lost productivity. They may miss project deadlines, important meetings or produce poor quality work. Workers inability and inefficiency caused by addiction to stock gambling may lead to employee dismissal. This leads to loss of income and thus inability to pay his or her bills as well as expense or service their loans. The Effect of Gambling in the Stock Market on Macroeconomic The macroeconomic effects of gambling are devastating to individual gamblers and country as a whole. The effects of smuggling have been evident since the introduction of stock trading over 200 years ago in the United States. The macroeconomic effects of gambling in the stock exchange are evident in the present time. According to Trimikliniotis (1), Cypriot Banks gambled with depositors’ money and the result was devastating to the country as a whole. The banks invested heavily in Greek Sovereign Debt. However, Greek sovereign debt restructuring caused significant losses equivalent to over and above 25% of the gross domestic product of Cyprus. Consequently, the banks transferred their bad investments to the government by demanding bailout from the Cypriot Treasury (Trimikliniotis 1). In return, the Cypriot government turned to the European Union for the bail-out. The unemployment rate in Cyprus has increased as more and more people lost their jobs due to the financial crisis. Gambling in the stock exchange is linked with the Great Depression of 1929, market crash of the year 2000 and Great Recession of the year 2009 as explained by Fields (18). The Great Depression of 1929, the Market Crash of 2000 and the Great Recession of 2009 were caused by over valuation of stocks as well as margin stock purchases in the absence of sufficient liquidity in the stock market. The market crash of 2000 caused a loss of over USD 8 trillion of investors’ wealth. The great recession of 2009 led to a loss of USD 0.5 trillion in wealth. According to Looney, October 19, 1929 was referred to as Black Monday when Dow plunged 508 points. Other bad days linked with gambling when stock prices dropped significantly include 5th September 1929 and the Black Tuesday of 29th October 1929. On Black Tuesday in the United States, the prices of stock crushed down and the stock market collapsed. As a result, thousands of investors lost their fortunes and many small businesses were put out of business. In fact, the stock market dropped 11.5% and over USD14 billion of wealth was lost during the market crash. Gambling in the stock exchange may also lead to employment of increased number of police officers and legal officers to enforce and prosecute offenders respectively. This is because gambling may give rise to many offenders who may steal, defraud or commit other criminal offences in an attempt to raise money for gambling. Increase in number of criminals requires additional personnel to handle them and this lead to increase in social costs. Furthermore, the government may have to spend more money in health care facilities to manage increase number of depressed gamblers. How to Reduce Risks in Investments There are a number of ways by which risk can be reduced in the stock exchange markets. It is important for ever trader in the stock market, be it an individual or an institution to understand that the market is extremely risky and adequate steps need to be taken to protect capital and generate positive returns. Investment risks can be reduced and managed in a number of ways. First, it is important to diversify the asset portfolio. Diversification of stocks refers to spreading investments across different stocks, bonds, mutual funds, options and futures among other investment vehicles to reduce the overall risk. Diversification is appropriate because at least one class of investment assets will always do well as compared to the others. Investors should invest in stocks of companies in different sectors such as health, technology, finance, education and real estate at the same time after careful analysis. Investing in non-related sectors and companies at the same time reduces the overall risk because at least one sector or company must perform well even if others perform poorly. According to Tyson (28), individual markets may crush but all of them cannot crush at the same time. For example in 1987, United States stock market crushed but majority of foreign stock markets performed well or drop less while others remained constant. Secondly, an investor should adopt a long time investment horizon. It is possible to get higher returns if a person invests longer. Time is an important factor when it comes to reducing stock investment risks. Longer time horizon gives time for the investment assets to grow because markets follow fundamental factors and not rumors or opinions which may affect the stock market only for a short time. Thirdly, invest in smaller quantities. It is prudent to invest in smaller amounts and monitor returns on that investment. If there are positive returns, contribute regular amounts for a given period of time. This allows investors to spot best performing stocks over a long period of time. Fourth, investors should seek advice from a professionals or experts. Professional should be hired to give professional advice and oversight to stock traders. Competent professionals or experts may give appropriate advice to help investors make informed decisions. The experts may also offer different investment options based on individual investors’ goals, keeping in mind investor’s ability to manage risk and his or her risk appetite. In addition, experts are able to apply technical analysis because they understand how they work and when to apply them to advantage of the investor (Guppy, 4). Fifth, investors should choose the right companies. Study the companies more and evaluate their performance. It is important to monitor companies one intends to invest in by watching news, and reading financial results and other relevant information such as economic data. This helps in knowing how the company performs in the market. Tyson (131) attests that company’s value and financial condition, as well as business strategy, need to be considered to prevent one from investing in overpriced stocks or in companies on the verge of major problems. Finally, a person can create better odds in stock trading than in casino if a person respect the markets and risk management strategies. Summary Investment is about developing long time goals, it is systematic approach, it is for the risk averse and it should be done from an informed point of view. Gamblers are prompted to action by promise of get rich quick and easily. However, college professor Alex Samuels clearly points out that trading in stocks is not an undertaking suited for many people. This is because stock trading requires careful examination of relevant facts and not shallow opinions from newspapers or some advisers (Doak 45). There are serious social and macroeconomic effects of gambling. On the social front, the gamblers may engage in criminal activities, they may suffer from physical and psychological problems as well as they may cause disharmony and stress to the people close to them especially the family. Gambling also devastates the economy when prices tumbles and many investors loss their wealth. In addition, the amount of bailout dedicated to save the affected banks is enormous and affect the economies negatively. A person may choose to do the right thing and become a better investor by reducing trading risks through diversification, choosing long time horizon, investing in small quantities, choosing the right companies and seeking experts’ opinions. Works Cited Doak, Robin. Black Tuesday: Prelude to the Great Depression. Minneapolis MN: Capstone, 2007. Print. Fields, Lenwood. Let's Face The Truth: An Outsider's View of the 2009 Great Recession. Morgan Hill, CA: Bookstand Publishing, 2010. Print. Guppy, Daryl. Better Stock Trading: Money and Risk Management. New York, NY: John Wiley & Sons, 2011. Print. Looney, Ed. Stock Market Gambling, the Council on Compulsive Gambling. New Jersey, NJ: New Jersey, Inc. 14 July 2003. Web. 4 May 2013. . Savoth, Eric. Spectacular Speculation: Thrills, the Economy, and Popular Discourse. Stanford, CA: Stanford University Press, 2013. Print. Snyder, Michael. The Big Banks Are Recklessly Gambling With Our Money, And It Will Cause The Global Financial System To Collapse. 2 April 2013. Web. 4 May 2013. . Trimikliniotis, Nicos. The Cyprus Euro Crisis: The Beginning of the End of the Eurozone? Global Research. 26 March 2013. Web. 4 May 2013. < http://www.globalresearch.ca/the- cyprus-eurocrisis-the-beginning-of-the-end-of- the-eurozone/5328518>. Tyson, Eric. Investing For Dummies. 4th ed. New York, NY: John Wiley & Sons, 2011. Print. Read More