Is investing gambling? Understanding the difference
To answer the question, ‘Is investing the same as gambling?’ First, we should look at what exactly is investing and gambling.
Gambling and investing
Investing is the act of committing capital to certain assets, expecting to make a profit. Let’s take the stock market for example; you put money in stocks and hold those stocks for years, and sell them later for a higher price than you bought the stocks for. Capital appreciation and active income (dividends and interests) are two ways by which you can make a profit out of your investments.
Gambling is staking money on an event whose outcome is uncertain and mostly involves chance. Gamblers hope to make money by betting on the ‘most likely’ outcome, even though generally it is a random chance. A flip of a card, a roll of a dice, the outcome of a sports game are some of the most common gambling events.
Investing vs gambling; similarities
Now, that you know what each of these is, let’s look at some common characteristics both have.
Investing and gambling are, essentially, you risking your money for future profit. And both investing and gambling have risks associated with them. However, the risks are quite lower in investing when compared to the risk associated with gambling. Also, whether you want to invest or gamble, you have plenty of options to choose from; different asset classes (stocks, bonds, funds) in investing and different betting events in gambling (casino games, horse races, sports games).
Generally, both involve a certain amount of fees to be paid regardless of whether or not you make a profit; ‘points’ in gambling which is charged by the body/organization that hosts the bets, and ‘commissions’ charged by the brokerages when you buy or sell shares. Another characteristic that both investors and gamblers share is information, particularly information on the outcome of the investment/gamble.
As an investor, you want to know the past performance of stocks, financials, and fundamentals of the company. Gamblers, on the other hand, look for information regarding the most frequent outcome of the event. If it is a football game, gamblers learn more about the teams; their past performance, the line ups, etc. It’s easy for investors to find information on stocks, but gamblers, usually have a hard time finding information about the likely outcome of the gambling event, which often leads them to fully rely on chance.
Investing vs gambling; differences
Even though gambling and investing share some similarities, there exist a lot of differences between these two.
Research vs luck
Investing is a planned activity performed with a specific goal in mind. A lot of research goes into investing. The past and estimated future performance of the stock, risk tolerance, financial goals are taken into account while investing. Investors analyze the fundamentals of the underlying company before investing in the stock; financials and business fundamentals are studied closely to make sure the stock is suitable for the investment strategy. The strategy is prepared with a specific goal and time period in mind – saving up for retirement, increasing long-term wealth, children’s education, etc.
Gambling, however, mostly involves chance and speculation. Gamblers are staking money on an uncertain outcome. Gamblers have no way of predicting the outcome of the random event on which they have staked their money, and it mostly depends on luck. Consider the rolling of a dice. In the case of an unbiased die, all six outcomes have equal probabilities, and the gambler could win or lose money based on the outcome.
The risk factor
Investing involves risks – nobody can deny that. However, there are a lot of ways you can mitigate risk in investing. You can have a diversified portfolio, dividing the risk into different asset classes and industries. Moreover, even if you lose money in investing, you can always get it back- either by using a different investment option or just by waiting for the stock to go up. And you can always take out your money and put it elsewhere, even with a small loss. In investing, it’s highly unlikely that anybody will lose all of their money, only partial losses. Even the partial loss occurs only when you sell stock. So if you can hold on to those stocks, you might get a chance to sell them for a profit later.
However, in gambling, there is no way to mitigate risk – and the risk is exponential. Because gambling follows an all-in strategy; when you bet on something, you either win and get rewarded or lose all of your money. And there is no way to get that money back. If you bet on a certain horse at a horse race, and the horse does not win the race, it does not matter if the horse got the second position, you’ll lose all your wager. If you plan to get back the money you lost by playing again, you still have the same chance, and moreover, now you could lose additional money. In gambling, the probability of losing money is higher than the probability of earning a profit.
Investing vs gambling; Long term vs short time
This is a major difference between gambling and investing; one is short-term and the other is long-term. Investing is usually done in years or decades even. Because the basic principle behind investing is the more time you allow your investments to grow, the more valuable they will be. Gambling, on the other hand, is a short-lived activity – a couple of minutes, few hours, or even some days.
Due to the lesser time available with gambling, you seemingly have no way to claim your money if you see that you are losing the bet – the bet is over once the game or hand is over. Within this short period of time, you either lose all your money, or you win some. Also, in gambling ‘the house’ always has an edge – a mathematical advantage over the gambler that increases the longer the gambler plays. Whereas, in investing the stock market tends to appreciate in the long term. Between March 1980 and March 2021, the S&P 500 had a total return of 10344.471% (dividends reinvested), an average annual return of 12%. This means, if you had invested $1000 in 1980, you’d have $104,218 by 2021. So if you keep at it, the odds will be in your favor as an investor, and not in your favor as a gambler.
With investing, you’ll also be rewarded for the time you commit the capital to a particular stock, which means, you’ll be paid just for holding the stock. And that brings us to the next distinction.
Ownership; nothing vs something
When you gamble, you own nothing. You merely stake money on a random outcome of an event.
When you invest in a stock, you own a share of the underlying company, which means you are a shareholder in the company. Most companies reward their shareholders for the risk they take by committing the capital, in the form of dividends. These are cash payouts paid to the shareholders in specific intervals for each share the investor owns. That way, you’ll have active income just from owning those stocks.
In gambling, there is always instant gratification or instant disappointment, depending on the outcome – you win, or you lose. So that leaves you no room for error.
With investing, there is no instant gratification. You’re in it for the long term. On the bright side, that gives you plenty of time to improvise if something goes wrong. Say, in one of the stocks you own, the underlying company is on the verge of bankruptcy, you can still get out and put that money elsewhere.
Addiction vs the healthy way
Gambling can be addictive; the notion of doubling or tripling your money is certainly attractive. That might even happen once or twice, which will persuade you to stake all of your money on the next bet – because we are human beings, and it can be difficult to resist those temptations. Most likely, you’ll lose that bet, thereby all of your money. Some gamblers would be adamant to win their money back, so they’ll keep playing, till they get their money back. But most end up without a penny.
Investing is a proven and healthy way to build wealth in the long run, as the stock market tends to appreciate over time.
Why shouldn’t you gamble?
For all the reasons above, you shouldn’t gamble with your money. There is a high chance that you’ll lose all of your money then make a profit. You might win some in the short term, but you’ll lose in the long run.
Is investing a form of gambling?
The answer is no.
Just because returns are uncertain with investing, that does not make it gambling. Investing gives you ownership of an asset with the potential for capital appreciation (increase in value of the asset over time). You might even be rewarded while you wait, in the form of dividends or interests. Whereas gambling is staking money on the outcome of an event – which is uncertain, highly risky, and you won’t own anything.
That being said, there are investors who gamble with their investments. Some of them buy and sell huge quantities of shares in a single day (referred to as trading), and some bet on stocks to go down (shorting). These are high-risk options and not sustainable in the long run. Also, there are investors who just buy ‘hot’ stocks, without understanding what they are getting into – which is simply gambling, but with stocks instead of horses or cards.
So if you want to start investing, make sure you start off on the right foot. Read how you can start buying stocks and what you should keep in mind.
Why should you invest?
Investing in the stock market is an efficient way to beat inflation. Inflation is the decline of purchasing power of a given currency over time. It can also be seen as the increase in the price of goods and services for daily consumption. To put it into perspective, say you add $10,000 into savings every year. In 5 years you’ll have $50,000, but that’ll only be worth 47,500, assuming the inflation rate is 5% a year.
However, if you invest $10,000 in an index fund with an average annual return of 10%, in 5 years, you’ll have $58,370, which will be worth $55,870, assuming that you’ll invest $10,000 in the four consecutive years and the inflation rate is 5% a year. Not only did you beat inflation, but you also managed to level up your personal finance game.
Investing is also a proven way to build long-term wealth. If you had invested $10,000 in the S&P 500 index in 1980, the investment would be nominally worth approximately $978,858.45 in 2021. This is a return on investment of 9,688.58%. Legendary investors like Warren Buffett build their wealth from stocks, using an investment strategy known as value investing. It is an investment strategy where investors look for stocks that currently trade for less than their intrinsic value.
Frequently asked Questions
Is the stock market basically gambling?
No. On the contrary, investing in the stock market is a proven way to build long-term wealth.
Is stock trading a form of gambling?
Day trading is buying and selling shares on the same day. Due to the high-risk nature of trading and the potential to lose a lot of money, it is often compared with gambling. Like gambling, day trading is not sustainable in the long run.
If you would like to learn more about value investing, try our Amazon bestseller The 8-Step Beginner’s Guide to Value Investing
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