Personal Finance Solutions for India

Is share market a casino?


Defined Tag: Stock Market.

Stories of rags-to-riches are relatively few, but share market readily brings to
mind innumerable stories of huge fortunes lost. The circumstances and timing may
be widely different. But the common element has been the share market,
reinforcing firmly in our mind that share market can only be compared to a
gambling den or casino.

This popular conception, however, does not stop the daring to try and make quick
or big money from share market, especially in today's booming times.
Let us examine this a little closely.

If Manoj buys a share of A Ltd at Rs 140 from Ashok and the price of A Ltd goes
up by Rs 10, Manoj can sell this share for Rs 150 and make a profit of Rs 10.
His profit of Rs 10 would have been Ashok's if he had not sold the share.
This would point to the direction that share market transactions are zero-sum
games, where all profits will equal all losses. But there is a difference
between buying soap or rice and buying a share. Herein lies the difference.

A cake of soap is bought for consumption and therefore its utility value may not
change much. But when you buy shares, you are buying a right to a productive
asset, which can attain higher economic value over a period of time.
The business may make profits, partially give you dividends, plough back part of
its profits, obtain loans, expand business, enter a new line of business and so
forth and give you a bigger dividend and an even bigger growth in business as
time passes.

Thus a share, being a micro part ownership of a business, has an earning power
and a potential to change in economic value.

Therefore, share market profits can result from growth creation and need not
result from somebody else's real losses; there may be a hypothetical loss
calculated by a previous owner, when a buyer has subsequently gained, but that
is a different matter.

Then, why do people make big losses in share market? Because, a share may be an
economic asset, but there is no guarantee that the business will make money.
Hence there can be no guarantee that you will make profits in the share market.

Is it possible to consistently make profits in the share market? Theoretically,
yes. But there are many people who make a reasonable amount of money from share
market. They make losses in some transactions, but many make an overall profit.
How can one make a consistent profit from share market? There is no unique
formula followed by all. If every body followed the same ideas there would be no
market, because there would be either all buyers or all sellers for a particular
company's shares.

But like every market, there are opportunities in trading with a short-term
focus. But since dealings are in productive assets and not in perishables, there
are potential gains also over the very long run.

Seasoned players and legendary investors have made fortunes by identifying large
value creation over long periods. Human psychological factors like greed and
fear also affect share markets periodically in cycles. People with steel nerves
also make large monies taking advantage of such times.

However, the most important point to remember is that it is a market where large
amounts are dealt. So, there are no quarters given or no quarters asked.
A huge market, that share market is, lends anonymity to the players. This also
gives rise to unhealthy actions and trickeries.

The share market gold rush predictably supports a very large number of real and
fake experts with grounding in real or voodoo branches of knowledge.
Share market, therefore, is not a casino. No doubt, it is a daunting sea for the
uninitiated, but it is also a very rewarding avenue for the one who is prepared
to learn the ropes.