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The greatest stock market myth is the idea that investing in stocks is a form of gambling!
The financial markets are often compared to a casino. Put some money on X stock and you might as well be playing craps!
If that’s your impression, and it’s keeping you out of the markets, consider this: If investing is organized gambling, it’s one of the rare kinds where the odds are stacked in your favor!
Why is that?
Corporate profits are the key to understanding the investor’s edge. By buying a share of stock gives its holder an ownership claim on that company’s earnings. If those earnings go up, then the stock price will usually rise as well. Makes sense, doesn’t it? Ownership of a company that has higher earnings should be worth more than ownership of a company that earns less.
An investment in the stock market comes down to this: It’s a “bet” that corporate profits will rise! Based on the historical evidence, it’s a pretty good wager! Not a guarantee by any means, but one where you hold house odds.
Still not convinced?
Maybe you’re saying to yourself that just because corporate earnings rise in most years doesn’t mean there aren’t years in which they fall. True enough. But over the last 200 years, business profits have increased in far more years than they have decreased. And that’s because the economies in the developed countries have expanded at a fairly steady pace with only several occasional setbacks from recessions.
And that means stockholders with a good mix of companies are more likely than not to make money!
Gambling just transfers money from a loser to a winner because it produces nothing … excluding the severe doses of adrenaline!
On the other hand, investing increases overall wealth because the capital invested in stocks provides the initial funding for firms, which exist for the purpose to producing goods and services.
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