Family finance

by Peter Crawford

Is investing in shares like gambling?

To some extent any share investment is a gamble, but you can moderate the risk by understanding economics and the businesses in which you’re investing.

The purpose of the share market is to provide equity capital to businesses so they don’t have to borrow the money from the bank.

Shares represent part ownership in a business, giving the share holder the right to participate in the growth of the business. The shareholder receives dividends from the profits and assets of the business if it decides to distribute money to shareholders rather than retaining the money for future growth of the business.

There are two major risks to your money when you invest in shares:

  • If the company fails you may lose all of your investment.
  • The share market or the value of shares in the business you have invested in may fall. If you have to sell your shares at that time you will lose money.

Speculation takes place when investors decide to trade a company’s stock, often at share prices that do not reflect the actual value of capital owned by the business or the future dividend income which could be earned from profits.

The downturn in the US share market several years ago was widely expected because share prices no longer reflected future company profits or what the assets of the business could be realistically sold for. Share prices were increasing rapidly so the prospects of making a financial gain from buying shares and selling them when the price went up looked good but the risks of losing also increased as share prices increased above the true values.

Wise investors would do well to heed this advice: “Do not wear yourself out to get rich; have the wisdom to show restraint. Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle” (Proverbs 23:4-5).

If an investor has a get-rich-quick attitude and believes that they can gain something for virtually nothing, then the share market constitutes gambling rather than a legitimate form of investment that takes time and effort to generate a steady return for the future.

In general there is nothing morally wrong with investing in shares — it is our attitude that’s most important in determining whether it’s right or wrong for us as individuals.

We need both the counsel of our Creator God, our spouse and friends and specialist advisors if we are to invest wisely in the share market and make wise use of the resources we have been given to manage.

Courtesy Crown Financial Ministries www.crown.org.nz

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