Kuukua, a JHS Two teacher, displayed the picture of a sucker on the board during one of her integrated science lessons on a Wednesday morning. The sucker neither bore fruits nor was it labeled, so one of the students, Babbie, who was mystified asked whether it was a banana sucker or a plantain sucker (banana or plantain plant).
The differential characteristics of both suckers are not that obvious, unless there are fruits hanging on them. Naturally, the teacher’s job that morning was well cut out. But hey, can you enumerate their distinguishing differences in case your child has that as homework and asks for your help?
Babbie’s state of conundrum, came to mind as a result of a question that a manager asked a colleague of mine. His was simple. He wanted to know whether investment in stocks can be described as gambling or not. Indeed, in view of the risks associated with investing on the stock market, many view it as gambling or not different from lottery.
That is puzzling, isn’t it? But be assured that although banana and plantain suckers look alike, they are undoubtedly not the same. Similarly, identical twins certainly have some unique physical differences that identifies each of them. Conversely, investment in stocks and gambling cannot be that identical.
They are completely different and far apart from each other and should not be comparable to the scenarios described above. Gambling is described as the act of playing a game of chance for money or for something of material substance or taking a risky action in the hope of a desired result. While the act of investing is described as the action or process of spending money to earn a profit. Consequently, stock market investment, characteristically, represents part ownership in a corporation and entitles the investor part of that corporation’s earnings and assets.
Indeed, Jesus says in Matthew 7:16 that ‘By their fruits you will recognize them’. As such, there would have been no ambiguity for Babbie if the sucker she saw in the picture had fruits hanging on it or was well labeled. Likewise, some people use the risky nature of stock market investment as the ‘fruit’ that identifies investing in shares as an act of gambling. Undeniably, a measure of risk is involved in all financial investments.
Some people buy Treasury Bills and Bonds with expectation of some interest income. Others buy real estate, without knowing if the value of a property will appreciate or depreciate over time. Others also deposit their money in a bank, trusting that their savings will be secure. While the stock market is more complicated, one who invests in stocks buys the shares of a company with the anticipation that the company will be profitable and the shares will increase in value. For such ones, they get higher value for their investment and sometimes, dividend income
Clearly, such an investment is straight forward and differs from gambling because the shareholder has purchased and owns part of a company for as long as he holds the shares. These shares may be sold to another person or saved in the expectation of future growth. This cannot be said of a person who stakes lotto, bets money at a casino or on a game of chance. Against the odds, the gambler seeks to predict an uncertain outcome and win the loser or losers’ stakes. Whereas, investment in shares comes with the direct benefit of capital appreciation or dividend income, subject to the company’s performance.
Shares are floated when companies need capital to operate successfully. Or when a company prospers and requires additional capital for expansion, its existing owners may choose to issue new shares and offer same to some new investors; it can be to the general public. In other words, owners of a company can equally decide to sell part of their existing shares to other investors for various reasons. As a result, persons buying the shares are buying a piece of the company’s pie qualifying them to own a slice or a part of the company. The shares therefore become part of a shareholder’s assets. Gambling or lottery does not come with any right of ownership hence has no vocabulary like transfer of asset or ownership rights.
Investment in financial instruments are not risk free. More so, it is said that the higher the returns on an investment, the bigger the risk associated with that investment. Stock markets are associated with high risks which then suggest that, all things being equal, investment in stocks should yield higher returns over time. But if the amount of risk involved in stock market investment makes it appear as lottery or gambling, then it will be as though one is saying that oranges and apples are the same because of their shape, yet they are obviously not. But what exactly is a stock exchange and must it always be associated with risk?
Anything that involves the meeting of buyers and sellers to conduct business is referred to as market. Similarly, the stock exchange is a marketplace for those who buy and sell stocks. Before the development of the stock exchange, stocks were traded through brokers at coffeehouses and on the roadside.
Now there are stock exchanges in many countries including Ghana. On any given business day, at any hour, there is a stock market open somewhere in the world; it is a twenty-four hour business across the globe. To trade stocks, an investor usually opens an account with a brokerage firm and places an order. Today, orders to buy or sell stocks can be placed over the telephone, through the Internet, or in person. Like Ghana, some exchanges have adopted a completely electronic trading system, where trades can be made seconds after the order is placed with a brokerage firm. Nonetheless, the direction of share prices are determined by the forces of demand and supply, although those forces have several defining factors.
Risk has always been part of life but how it is mitigated determines the rate of success. Investors need the advice of stock market professional investment advisors in order to mitigate the risks that are associated with investing on the stock market. Investment advisers consider a company’s past record, future prospects, the demand for its products as well as competition from other businesses, and several other factors to provide investment advice. This information is often available for free in our jurisdiction. Although such investment advices do not insulate the investor from investment related risks, it is always better to err on the side of caution than to throw caution to the wind. As such, it is prudent for potential investors and shareholders to deal with the stockbrokers so as to receive some guidance to avoid making wrong investment decisions.
Having considered all the above factors, it is clear that investing through the stock market cannot be compared to gambling. They have absolutely nothing in common. On the other hand, Kuukua must teach Babbie and her fellow classmates to be able to differentiate between banana and plantain suckers. So she brought out another picture with a second sucker to explain the unique characteristics that differentiate between the two suckers, even without the fruits hanging on each of them. The students have now realised that while the colours of the leaves on both plantain and banana suckers vary, the shapes are the same. They have also seen that plantain leaves are similarly shaped to shoe soles, while banana leaves tend to be longer, more tubular and sometimes even sword-shaped. Therefore, much as banana and plantain suckers may look closely alike, there are differences between the two. Comparatively however, the same cannot be said about differences that exist between the stock market and lottery or gambling; there are more unambiguous and substantial unrelated characteristics between the two.