• Money
    • Budget
    • Shop
    • Travel
    • Stories
  • Career
    • Advice
    • Entrepreneurship
    • Freelance
    • Small Business
  • Investing
    • General
    • IRA + 401K
    • Stocks + Bonds
    • Retirement Planning
    • Estate
  • The Basics
    • Student Loans
    • Credit Cards
    • Debt
    • Taxes
    • More
  1. Home
  2. Investing
  3. Stocks + Bonds
  4. How to Play the Stock Market, Not the Lottery

How to Play the Stock Market, Not the Lottery

January 18, 2018
By: Esther Bergdahl
  • Share
  • Share on Facebook
Dapper young Black man in fancy office
credit: @gentsamongmen/Twenty20

For some, Wall Street makes about as much sense as scratch-off tickets. If the risk isn't intolerable, it's baffling, and if it isn't baffling, it's likely to tempt you into high-risk behaviors. But even the experts have only recently come to understand a key truth about risk — that in the stock market, not even the big ones guarantee a big payoff.

Video of the Day

Using a supercomputer at the University of Texas at Austin, researchers dug deep into nearly 50 years of stock market data. They were looking for the reason high-risk assets don't always deliver superstar returns, a discrepancy called the beta anomaly. Like so many quirks of finance, the reason doesn't come down to the math. It's all about the buyers.

A stock with a "high beta" is one that a buyer believes could pay big dividends down the road. It excites the same possibilities that a lottery ticket does, in other words. "Theory predicts that stocks with high betas do better in the long run than stocks with low betas," co-author and professor of finance Scott Murray said in a press release. "Doing our analysis, we find that there really isn't a difference in the performance of stocks with different betas."

When you separate your betting instincts from data about a stock, it's much more likely to follow pricing according to asset pricing theory. If you overestimate how much you'll win or lose on a stock, you're also probably overestimating the likelihood of extreme events that would cause such a return. According to Murray, "The study helps investors understand how they can avoid the pitfalls if they want to generate returns by taking more risks."

You have a lot of data at your disposal about stock histories, performances, and predictions — and unlike the lottery, that's something you can use.



Show Comments

Related Articles

The Disadvantages of Investing in the Stock Market

The Disadvantages of Investing in the Stock Market

Investing
Stocks + Bonds
By: Tim Plaehn
6 Characteristics of the Stock Market

6 Characteristics of the Stock Market

Investing
Stocks + Bonds
By: Victoria Duff

PARTNER CONTENT

20 Common Money Mistakes to Avoid

20 Common Money Mistakes to Avoid

The Effects of Recession on the Stock Market

The Effects of Recession on the Stock Market

Investing
Stocks + Bonds
By: Sue-Lynn Carty
What Is the Meaning of Bull Run in the Stock Market?

What Is the Meaning of Bull Run in the Stock Market?

Investing
Stocks + Bonds
By: Alex Kocic
SEBI Guidelines for the Primary Market

SEBI Guidelines for the Primary Market

Investing
Stocks + Bonds
By: Ben Taylor

Get Weekly Savings& Finance Tips.

  • Money
  • Career
  • Investing
  • The Basics
  • About
  • Contact Us
  • Terms
  • Privacy Policy
  • Copyright Policy
© 2019 Leaf Group Ltd. Leaf Group Media

Get Weekly Savings
& Finance Tips.

Money Made Easier.

Please enter a valid email.