Introduction
People often compare investing to gambling. For a non-investor, the stock market might indeed seem like a gamble.
One of the best and also most common things I’ve heard is that investing is just gambling because there’s a 50-50 chance of winning – the stock goes either up or down. Hard to argue with that.
Of course, while the reality is a bit different, the fact is that both involve a certain amount of uncertainty and luck.
Although gambling and investing are two completely different concepts, they do have some similarities.
Similarities
Both investing and gambling are about estimating the relationship between risk and return.
The common goal is to make as much profit as you can with the least amount of risk. Both also include uncertainty; you can never know for sure whether something is a good bet or a great investment.
It’s worth noticing that the similarities depend largely on your investment strategy. The more speculative investments you make, the closer you get to gambling.
If you invest in well-diversified exchange-traded funds between different asset classes, you’re quite far from gambling.
When you invest in highly volatile individual stocks for a short period to make money quickly, you take a higher risk and move towards stock market gambling.
Key Differences
While there are some similarities between investing and gambling, there are numerous factors that separate them. Here, I’ve gathered the four key differences.
Information
The more you know, the less risk you take. This applies to both investing and gambling. If you would somehow know everything there is to know about an investment, it would significantly reduce your risk level. The same goes for gambling.
The difference is that in investing, there is almost an endless stream of information available for investors.
In investing, listed companies are obligated to provide a regulated amount of information in their yearly and annual reports.
There are also analysts who devote a major part of their time to analyzing a company and have sometimes access to information that others don’t.
When you invest in the stock market, you have all the time in the world to search for information and use it to make an informed decision. There’s no rush to buy or sell stocks. No one is forcing you to do anything.
In gambling like card games, for example, the amount of information is usually extremely scarce. On most occasions, you have no way to get extra information or gain any benefit from it.
Time frame
There’s a major difference in the time you can spend making your bet. If you spend hours making up your mind at a roulette table, you’ll most likely be asked to leave. No one’s going to remove you from the stock market.
Sometimes investors might research and follow a certain stock for years before actually buying it.
When you invest, you can invest for decades. In investing, time is your friend. Even if your investment doesn’t do well at first, you have years and years for it to turn out profitable.
In gambling, your time frame can only be seconds or minutes. No one really expects gambling to be a long-term action.
For example, if you Google long-term investing, you end up with tips, guides, and strategies for successful investing. If you Google long-term gambling, you end up reading about compulsive and problem gambling.
Ownership
When you purchase stocks, you own a piece of the company you invest in. Even though the piece you own is most likely quite small, you still literally own a part of the company.
Moreover, depending on your investment decisions, you can receive income in the form of dividends that build your wealth.
In gambling, there is no such ownership. Of course, you can own the horse you’re betting on, but generally, a gambler only owns the money he gambles.
Losses
Although there are ways for professional gamblers to mitigate losses in gambling, handling losses in investing is an entirely different thing.
The longer you invest with a diversified portfolio, the more probable your profits are. The probability of profits rise in the stock market because the companies tend to grow and create value in long term. In gambling, the odds of winning do not increase over time.
Another thing is that if you lose when gambling, you usually lose your whole bet at once. In investing, you start to lose it gradually, if your investments start to go down. There are plenty of opportunities to get out, even in short term.
Summary
So, as we have seen, the idea between investing and gambling is quite similar at first glance. The basis of both is to achieve the maximum amount of returns at the least amount of risk possible.
The key difference between the two is that investing in the stock market is based on creating value and building wealth in long term.
In investing, you can increase the odds of a positive outcome by investing long-term and diversifying your investments across different assets and markets.
In gambling, the odds of winning don’t increase the longer you gamble.
Investing is a part of personal finance planning, whereas gambling is usually not. You can use investments to ensure your financial security but telling people that you’re retirement plan is to gamble as long as possible, is probably going to raise some eyebrows.
