By Mateo Beltroy
Typically, when people want to gamble their money they go to the casino. What the general population does not know is how they unintentionally gamble in the stock market and the simple solution of investing long-term, rather than day trading. The stock market is the common market where companies are able to sell securities such as stocks, bonds, and shares. By doing this, the company makes the immediate cash from the customer that can be used for improvements, salary raises, other investments, etc. Meanwhile the customer, otherwise known as the stockholder, is now technically an owner of a piece of whatever company they decide to invest in, meaning that if the company increases in total value, the equity owned by the stockholder increases in value as well. The stock market allows stockholders to buy and sell their percentages of a company with ease. The goal of investing money in the stock market is to buy stocks when the company is not doing so well, therefore the value and price of its stock are at a low, and then hope that the company will increase its value so then the stockholder can sell their stock at a more expensive price, therefore making a profit from the difference.
The stock market seems like a wonderful idea in theory. Regular people are able to make a quick profit without working extra hours at their jobs. Even if they do not have time to personally invest their money themselves, there are other alternatives. Commission brokers, in simple terms, use the money of an ordinary citizen who wishes to invest in the market and invests it for them. Brokers are typically professionals and well-trained statistical analysts with plentiful work experience and a history of good trading. The way brokers make money, is through commission. For example, a broker may invest their client’s money in a certain company that they believe will see an increase in value in the near future. They make this prediction based on charts that analyze the past trading history of that company and look for patterns. If the prediction is correct, the broker receives a percentage of the total profit made by the actual stockholder. Brokers typically charge $30-$50 in fees to assist their clients with their investments (Guerra). The fee can easily be avoided if stockholders learned how to manage their own investments properly.
Investing money is usually a good way to increase personal net worth and save money. The catch is with day trading and short-term investments, which is what the majority of the population tends to do when investing their money. Brokers can only prove their success through past transactions in their portfolio, but who is to say that it may not have been luck every time? Selecting the correct stock to invest in is an impossible task. Nobody can predict the future; therefore, any prediction made about the market is not factual and is just an easy way for a broker to make money from their client’s investments. At that point stockholders are putting money in a company with hopes of a return, which is in theory, gambling. In a market with such high volatility, it is a risky move to invest money in the short-term due to the fact that nobody can correctly predict a market crash or what a company’s newest revolutionary product is, or what a certain politician had to say about a certain company. Events such as The Great Depression, September 11, 2001, and the Crisis of 2008, show how the market can change pretty much from one moment to the next, causing major losses and damage to the economy. However, a crash in the market can also be a good thing, such as in 1987 when the market crashed, giving the Dow Jones Industrial Average (DJIA) an opportunity to rise in value over the next decade (“Stock Exchange”). There are strategies when it comes to investing in the stock market that balances out the risk and volatility of the market. Such strategies are having a broad portfolio and investing long term.
Index Funds, 401 (k), Exchange-Traded Funds (ETFs), etc. have been studied and proven to be the most efficient form of investing that will result in the greatest possible return. According to John Bogle, the founder of Vanguard, index funds outperformed 94% of general mutual funds (Perry). Vanguard’s Total Stock Market Index (VTSAX) is a great example of a fund used for indexing and long-term investing. Observing the day-to-day volatility of the stock market can cause feelings begin to get involved and out of fear of losing money – or missing out on money – stockholders buy or sell their stock at the incorrect time. Involving feelings to the gambling aspect only increases the risk of losing money. Most people do not go to the casino and feel 100% confident about winning; the same can be applied to the stock market. The other issue is, that investment focuses on a single or a couple different companies, which is not good because if one company fails the stockholder will lose money. VTSAX solves both of these problems by providing a broad index fund of the most popular U.S companies in the market. Rather than investing money in an isolated company, the stockholder can own of a small percentage of various different companies, reducing the volatility of the market. According to Glassman, investing in broad index funds such as VTSAX lowers fees and provides immunity to the rapid panic trading of crowds (Glassman). The immunity is granted by the long-term holding strategy suggested by many successful investors. Daily spikes and drops in a company’s stock may cause panic to the mass population but that is not the case when holding a fund, such as VTSAX for a long time. Over long periods, the market grows regardless of the volatility throughout the stock’s history. This is the solution to avoiding the gambling aspect of the stock market.
Investing money is always a good idea. It is great way of turning money into a tool by making saved money make more money. Leaving money in a savings account is a guaranteed safe option, however if the goal is to grow personal wealth and retire comfortably, interest rates on savings accounts just won’t cut it. Although investing in the stock market comes with more risk, it also tends to lead to a greater reward than just letting it rot in a savings account. Risk can be reduced by using long-term investment strategies such as the ones mentioned earlier. Analyzing risk and making calculated investments will yield the greatest return and will bring financial independence to anyone who wants it.
Header photo from Marketwatch.
Glassman, James K. “The Power of Indexing.” Kiplinger’s Personal Finance, vol. 73, no. 4, Apr. 2019, pp. 13–15. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=bth&AN=134982798&site=eds-live.
Guerra, Tony. “How Much Is the Average Stock Broker’s Commission?” Work – Chron.com, http://work.chron.com/much-average-stock-brokers-commission-28267.html. Accessed 13 October 2019.
Perry, Mark J. “More Evidence That It’s Really Hard to ‘Beat the Market’ over Time, ~92% of Finance Professionals Can’t Do It.” American Enterprise Institute, AEI.org, 19 Mar. 2019, www.aei.org/carpe-diem/more-evidence-that-its-really-hard-to-beat-the-market-over-time-92-of-finance-professionals-cant-do-it-2/.
“Stock Exchange.” Funk & Wagnalls New World Encyclopedia, Jan. 2018, p. 1; EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=funk&AN=st190200&site=eds-live.