Connection between gambling and trading on stock/options/Forex markets

Question

Although this question may look like it belongs in the realm of religion, it is actually asking about the mechanics of trading on the stock / options / Forex markets.

Some background information:

Questions and answers about gambling on the Christianity.SE show that members of some denominations do not gamble because of reasons such as that it encourages receiving something for nothing and taking someone's money in exchange for nothing (which seems to refer to the other players who do not win).

Of course it could be argued that the price of a lottery ticket is not exactly "nothing" (it is still something) but I am more interested in the concept of receiving another persons money in exchange for nothing.

To frame this into the stock / options markets or Forex markets, it would be akin an investor gaining at the direct expense of other investors (who may have invested differently).

[Update]

There is for example this quote in the book "Mastering the Trade: Proven Techniques for Profiting from Intraday and Swing Trading Setups". The author John F Carter writes (ch. 1, par. 1):

Funds need days, and sometimes weeks or months, to move into and out of sizable positions without showing their hand. If they do show their hand, then other funds will front-run them (jump in front of their orders) and bury them if possible. That is how money is made in the markets - by taking it from other traders. If you think this sounds ruthless, you are right. It is.

Also when it comes to trading on the Forex it looks like the trading does not really contribute to anything. It could contribute in the sense that a sufficiently sizable investment might e.g. increase the value of a national currency, but this could also be detrimental for the nations exporting companies (unless they have hedged positions). On another hand it looks like betting against a currency (to make it lose value) can be a source of profit(?)

[End of update]

The question I wanted to ask is:

Can the mechanics on the stock / options / Forex markets in some situations be such that an investor profits at the direct expense of other investors?

Answer 1

For stocks, I would not see these as profiting at the expense of another individual.

When you purchase/trade stocks, you are exchanging items of equal market value at the time of the trade. Both parties are getting a fair exchange when the transaction happens.

If you buy a house, the seller has not profited at your expense. You have exchanged goods at market prices. If your house plummets in value and you lose $100k, it is not the sellers fault that you made the decision to purchase. The price was fair when you exchanged the goods. Future prices are speculative, so both parties must perform due diligence to make sure the exchange aligns with their interests.

Obviously, this is barring any sort of dishonesty or insider information on the part of either buyer or seller.

Answer 2

There is economic value added to the marketplace, by having many investors trading stocks. The stock market itself can be thought of as a tool which provides additional 'liquidity' to the marketplace. Liquidity is the ease with which you can convert your assets into cash (for example, how quickly could you sell your car if you needed money to pay a medical bill?).

Without a stock market, funds would be very illiquid - an investor would likely need to post advertisements to have other people consider buying his/her shares. Until the match between a buyer and seller is found, the person with the shares can't use the cash they need.

On the other side of the transaction, are people who have an appetite for risk. This means that, for various reasons, they are willing to take on more risk than you, if it pays off on average (they are young [and have many years of salary earnings in front of them], or they are rich [can afford to lose money sometimes if it pays off on average]). Consider this like a transaction between your insurance broker - you don't want to pay for a new car if you get in an accident, and you're willing to pay total annual premiums that, on average, will cost more than that same car over time. You don't want the risk, but the insurance company does - that's how they make money.

So by participating in any marketplace, you are providing value, in the form of liquidity, and by allowing the market to allocate risk to those willing to take it on.

Answer 3

There are moral distinctions that can be drawn between gambling and investing in stocks.

First and I think most important, in gambling you are trying to get money for nothing. You put $100 down on the roulette wheel and you hope to get $200 back.

In investing you are not trying to get something for nothing. You are buying a piece of a hopefully profit-making company. You are giving this company the use of your money, and in exchange you get a share of the profits. That is, you are quite definitely giving something: the use of your money for a period of time. You invest $100 of your money, and you hope to see that grow by maybe $5 or $10 a year typically.

You may get a sudden windfall, of course. You may buy a stock for $100 today and tomorrow it jumps to $200. But that's not the normal expectation.

Second, gambling is a zero sum game. If I gamble and win $100, then someone else had to lose $100. Investing is not a zero sum game. If I buy $100 worth of stock in a company and that grows to $200, I have in a sense "won" $100. But no one has lost $100 to give me that money. The money is the result of the profit that the company made by selling a valuable product or service to customers. When I go to the grocery store and buy a dozen eggs for $2, some percentage of that goes to the stockholders in the grocery store, say 5 cents. So did I lose 5 cents by buying those eggs? No. To me, a dozen eggs are worth at least $2, or I wouldn't have bought them. I got exactly what I paid for. I didn't lose anything.

Carrying that thought further, investing in the stock market puts money into businesses. It enables businesses to get started and to grow and expand. Assuming these are legitimate businesses, they then provide useful products and services to customers.

Gambling does not provide useful products and services to anyone -- except to the extent that people enjoy the process of gambling, in which case you could say that it is equivalent to playing a video game or watching a movie.

Third -- and these are all really related -- the whole goal of gambling is to take something from another person while giving him nothing in return. Again, if I buy a dozen eggs, I give the store my $2 (or whatever amount) and I get a dozen eggs in exchange. I got something of value and the store got something of value. We both walk away happy. But in gambling, my goal is that I will take your money and give you nothing in return.

It is certainly true that buying stocks involves risk, and we sometimes use the word "gamble" to describe any risk. But if it is a sin to take a risk, then almost everything you do in life is a sin. When you cross the street, there is a risk that you will be hit by a car you didn't see. When you drink a glass of water, there is the risk that it is contaminated and will poison you. When you get married, there is a risk that your spouse will divorce you and break your heart. Etc. We are all sinners, we all sin every day, but we don't sin quite THAT much. :-)

(BTW I don't think that gambling is a sin. Nothing in the Bible says that gambling is a sin. But I can comprehend the argument for it. I think gambling is foolish and I don't do it. My daughter works for a casino and she has often said how seeing people lose money in the casino regularly reminds her why it is stupid to gamble. Like she once commented on people who stand between two slot machines, feed them both coins and then pull the levers down at the same time, "so that", she said, "they can lose their money twice as fast".)

Answer 4

I think that the answer by @jkuz is good. I'd add that the there's a mathematically precise difference: Gambling games are typically "zero-sum" games, which means that every dollar won by one person is lost by another. (If there's a "house" taking a cut then it's worse than zero-sum, but let's ignore that for the moment.)

None of the markets that you mentioned are zero-sum because it's possible for both parties in the transaction to "win" since they typically have different objectives. If I buy stock, I typically desire for it to go up to make money, but, if I sell stock, I typically sell it because I want the money to do something else completely. The "something else" might be invest in another instrument if I think it's better or I'm rebalancing risk. It might also be to buy a house, pay for college, or (if I'm in retirement living on my investments) to buy food. If the stock goes up, the buyer won (increased investment) but the seller also won (got the "other thing" that they wanted/needed), which they would not have been able to get had there not been a buyer willing to pay cash for the stock.

Of course it's possible that in some cases not everyone wins because there is risk, but risk should not be considered synonymous with gambling because there's varying degrees of risk in everything you do.