can we gamble in the stock market

8/11/2019 Can We Gamble in the Stock Market

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THE great economist and Noble prize winner in economics, Paul Samuelson once said

Investment should be more like watching paint dr or watching grass grow! I" ou want

e#citement, take $%&& and go to 'as (egas!) This statement contains the message that

investment is not like plaing gambles! *ne should invest with long term vision not with

the purpose o" gambling to be rich overnight since no market o""ers such opportunit "or

anbod in the world e#cept the house o" gamblers such as 'as (egas! +ut the stock

market, though not a place "or gambling, involves gambling! So, should we gamble -e sa

es but a simple es is not su""icient since gambling involves the higher possibilit o"making an outright loss! -hile making investment decision in the stock market, an investor

"aces the .uestion/ whether he is taking risk or he is gambling *"ten the term risk is

con"used with gambling and investors "all into the pre to "oll behavior and pa the price

"or their mistake! I" he0she gambles, then how should he0she gamble

Sometimes investors need to take pure risk and sometime the need to do pure gambling

because investment opportunities come with di""erent in"ormation which is in most o" the

cases not complete! 1or e#ample, i" an investor sees that a stock is being currentl traded

at Tk 2&& and intends to purchase that, he0she needs to "orecast the discounted "uture

value o" the share! Even then he0she calculates the Net Present (alue 3NP(4 o" the share,

he0she ma "ind it .uite hard to reach on that basis to settle into the decision whether

he0she should purchase that share at all! This is a case o" taking pure risk because his

investment decision is circumscribed b calculated uncertaint and this uncertaint

introduces the element o" risk in his investment! *n the other hand, i" he sees that the

value o" a share which is a 5unk share has increased to 26& which he0she purchased at

786, he ma con5ecture on the basis o" second hand in"ormation that the value o" the

share ma increase more than 26& in the "uture 9 a sill behavior which pauperized

thousands o" investors in stock 2&7& stock market crash 9 and opt not to sell the share

though the current market price o""ers good pro"it! This is a pure gamble! :inimizing

losses along with gambling in the stock market is the "oremost challenge "or an investor!

;ambling on share price 26& puts the investors at high stake o" making loss in "uture! So

what is the solution then

To "ind out the solution, we can imagine a situation like this! 'et


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market investor and has invested 7&&&&&Tk! "resh capital in the stock market! To simpli"

the analsis more, we also think that he has invested the whole capital in one stock called

! His prudent investment strateg has paid o"", and he has made a gain e.ual to A&&&&Tk

in the stock! Now he0she is contemplating to build an investment port"olio investing in

di""erent kinds o" stocks! In his port"olio, there are two stocks called z and w! Investment

in z involves taking pure risk, and the investment in w stock involves gambling since he0shehas no clue about the NP( o" the stock and he 5ust invests in this stock with a 6&?6&

chance! Cs he0she has in total 7A&&&&Tk to invest in the total port"olio including in the z

and w stocks, he0she must "irst determine how much to invest in w stock and how much in

z stock! Then, the ver crucial one, he needs to speci" which mone he should invest in

which stock! Though total capital is now 7A&&&&Tk, A&&&& is the pro"it earned "rom selling

stock! Since, the investor will gamble on the market price o" w stock, he should gamble in

such wa that his loss is minimized and gains are still ma#imized even i" he0she makes anoutright loss! How is this possible This is possible i" he0she invests out o" A&&&& pro"its in

w stock! Now even i" he0she makes loss, he0she will lose the pro"it not his original capital!

Similarl, he should invest out o" 7&&&&& in the z stock! The strateg is that one should

gamble in the stock market using mone collected "rom immediate gains or the ver recent

gains "rom the stock market! This will help him0her to minimize loss and ma#imize gains in

the stock market!

-hat is the 5usti"ication "or this strateg The 5usti"ication is that toda


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