Yet, some people really like doing this. Is it a good idea? 

For some, having shares is fascinating, even addictive, and they cannot resist them. They just love watching them rise, and when the going is good, they tend to believe it will stay that way.

When the market eventually drops, the fun ends, but they may then be trapped in the market, or have to sell at a major loss. Investors need to be extremely careful and skilful in their stock selection. And they need to get their aims and priorities straight. 

Andreas Hackethal, a professor of finance at Goethe University in Frankfurt, argues that the two main reasons why people invest in individual shares are an over-estimation of their own abilities and sensation seeking.

In other words, they get a kind of high or kick when their shares go up, but just like taking real drugs, at some point the thrill wears off, and these thrills are not cheap. There is a phase of blissful ignorance, followed by a reality shock. 

Funds are in a sense like manufactured goods off the shelf, whereas individual shares are tailor made. This can make them very appealing, but doing it right is time-consuming, and those who do not understand what they are buying and monitor them constantly can pay a high price, in some cases literally in both senses.   

Thrill seeking?

Those buying stocks need to decide if they want the thrill of gambling or to pursue wealth rationally. The two can be mutually exclusive. 

The financial literature even refers to gambling psychology in the context of investment, and lottery tickets as an alternative to the stock market. The point is that if one really wants to gamble, the stock market is probably the wrong place, as investing in shares requires not only knowledge and skill, but cool rationality. 

One is not supposed to fall in love with one’s shares or to take imprudent and unnecessary risks. By contrast, that is arguably precisely what casinos are there for.   

The essence of the matter is for people to know what they want. Is it to gamble for fun or to invest for a profit, or perhaps a bit of both? If the aim is really to gamble, the stock market will invariably be handled very differently to a rational, profit-oriented investment strategy.

Most people do not want to gamble with their money, but neither do they want it to stagnate.

It has a lot to do with self-insight and not going down the wrong path, which can lead to distress and financial disaster.

Enormous losses can be incurred through a misconceived, mismanaged, or, to use the regulatory term, unsuitable portfolio. Thrill-seeking behaviour can ruin investors.

On the other hand, if they go to a casino, then they are at least playing with their cards on the table, even if the odds are against them. It is important that people do not delude themselves about their capabilities or what they are risking.

There are various things that stock-picking investors need to understand and often do not, especially if they are amateurs. It is these aspects that also differentiate gambling from investment. Furthermore, they apply to both successful investing and stock-market gambling. 

Investing is not a casino game

The main difference between the two is the level of acceptable risk and willingness to speculate. Investing requires prudence and a degree of risk aversion, whereas gambling suggests dispensing with such caution. But both want to do well and earn money.  

Some of the fundamentals are as follows.

In contrast to funds and exchange-traded funds, individual shares entail an additional risk. Every company is affected by both so-called systemic and non-systemic risk. The former relates to the market at a whole, and the latter to the specific company.

Accordingly, if something goes specifically wrong, the company shares can plummet, while the market as a whole remains unaffected. Bad managerial decisions, supply-chain problems and a host of other problems play their part.  

If, for example, you have 15 shares in your portfolio, you really need to be monitoring the development of all of them, which is not easy. And the associated risks do not necessarily mean higher returns either. 

Many other factors can determine whether the results are good, indifferent or disastrous. What happens at shareholder meetings, or regulatory changes, are just two more. 

Both investing and gambling entail risk. But they constitute two very different activities.

Another problem is that unwary investors often do not understand the economic mechanisms of underlying share-price formation. The stock market itself determines the prices, and only partly how the company itself is faring. 

The typical investor error is thus thinking that as long as you know and can trust the company, you cannot go wrong. 

Certainly, the optimal level of risk is the name of the investing game: not too much or too little. This point is not well understood by a lot of people, including many working in the investment industry, who ought to know better and convey more to clients.  

I remember overhearing an adviser asking an elderly lady how much risk she was willing to take. “None at all” was the response, after which the adviser fortunately explained why some risk is essential. 

I also know of litigation against a trustee who had left almost everything in bonds, with the result that the portfolio had performed appallingly over time, compared with a sensible combination with equities. 

Conversely, there are cases of people inheriting large lump sums and being advised, in an all-time-high stock market, into a portfolio comprising almost entirely individual shares. This too proves catastrophic if the market collapses a year later and remains so for a long time.  

Most people do not want to gamble with their money, but neither do they want it to stagnate in an insufficiently aggressive mix. 

A high-risk portfolio need not be gambling at all, but the mix of investments, the asset allocation, needs to be appropriate and sufficiently diversified. Even if mainly in one asset class, it is often possible to diversify adequately and ensure that one is not compelled to sell at a massive loss when the markets or personal circumstances change. 

In short, both investing and gambling entail risk. But they constitute two very different activities, such that mixing the two, or doing the wrong one inadvertently, is highly inadvisable.

What matters is to understand yourself, what you want, and how to get there through your financial activities. 

Brian Bloch is a freelance journalist