Gambling Vs Investing
Trading Vs Investing Vs Gambling. A lot of people confuse trading with gambling and stay away from it assuming it will just lead them losing money at the end of the day. Few others don’t really understand the difference between trading vs investing and with this confusion, they actually end up losing a lot of money. Investing: Where Are You More Likely to Win? Can you make more money gambling in a casino or investing in the stock market? Both investors and gamblers make decisions on where to place their money based on the likelihood of certain events happening.
Investing in the stock market carries inherent risks. Just like gambling, it involves the risking of capital in the hope of future financial gains. Both involve speculating on an outcome that can’t be guaranteed – however, there are also some key differences to bear in mind. Let’s take a look at the similarities and differences between gambling and investing.
The Similarities
Falling back on a safe option
Both gambling and investing offer the chance to fall back on a safe option. For gamblers, this might be playing on slot games that have a high payback rate – though offer less than you might stand to win at a high-risk slot. In blackjack, there are certain approaches to the game – and ways of budgeting – which can make a big difference to the house edge you’re up against, and how much you walk away with.
For example, the Martingale means you double your previous stake for every losing bet you make – so if you eventually win a hand you’ll have adequately compensated for your losses. We’d recommend putting these to the test when playing American blackjack before taking the table for real. Who knows, you might even prefer the experience, as so many gamblers do.
In investing, you can also choose to take a punt on tried-and-tested shares that have been rising in value incrementally over months – as opposed to throwing all your eggs into the same basket and investing in a start-up.
Picking the right moment to strike
It’s not always about having the nerve to take big decisions – it’s about knowing precisely when to make them, too. In gambling, your chance of success rests on how aware you are that you’re onto a winner or loser, and taking your chances to up the stakes or cut your losses. In investing, it’s very clear – you simply have to buy or sell at the right time. In both cases, this is a very narrow window of opportunity, and makes all the difference to ultimate success or failure.
Diversification
In gambling and investing, it’s wise to avoid ‘putting all your eggs in one basket’ and betting on multiple outcomes so you’re not too committed to one result which might not come off. Most investors tend to spread their money far and wide, dipping their toes into as many markets and industries as possible to achieve an overall gain.
Identifying patterns of behaviour
In sports betting, people gamble on the success of a player or team. Before making their bet they can take time to understandthe team or sportsperson’s form, so they’re making an educated guess at whether they’re more or less likely to win or lose. In investing, it’s much the same. An investor will study an individual’s shares meticulously – this is critical for effective decision-making.
Calculating risk
Weighing up risk and reward is the essence of both gambling and investing. The greater the risk, the greater the chance of rewards – but also the more likely it’ll result in failure. That ability to make tough (but not reckless) calls is crucial to long-term success in either field.
The Differences
Duration of the process
Investing is a life-long activity – or at least one you need to commit to for many years to enjoy success, as it gives you the chance to take advantage of the general rise of the stock market. However, gambling is essentially short term – taking place over the course of a single evening.
The economic cycle
Expansion, peak, contraction and trough are the four distinct phases of any economic cycle. Investors adjust their strategy accordingly depending on the stage of the given company or market. However, in gambling there’s no long-term process – everything hinges on the spin of a wheel or the revelation of a hand. It’s completely unrelated to any event that comes before or after.
The house always wins
Perhaps the biggest difference between investing and gambling is the concept of ‘the house always wins’. In investing, you’re betting on the course of the global economy. There are no forces working against you, it’s simply about whether you’re able to predict the rises and falls of companies and industries. In gambling, the casino is there to prevent you from winning. The house edge may vary between games, but ultimately it always wins – otherwise casinos wouldn’t exist.
Cutting your losses
In investing, there are a few things investors can do to stop their losses. If their stock falls, they can sell it off. However, if a gambler finds themselves on a downward curve, the chances are they’re going to lose everything.
Outside influences
Having said that, you could see investing as a whole lot more unpredictable – as it’s subject to outside influences. For example, after the attacks of 9/11 in 2001, stocks fell to a three-year low. However, the odds in gambling never change, which means they’re by some measures less volatile than investing.
Summary
Investing and gambling have two very different goals and it is these goals that separate them. There are similarities between the two, but fundamentally they are different from each other. Gambling carries much more risk than investing and serves to boost the profits of the casino owner or the player.
Investing, on the other hand, arguably provides much more benefit to society. Of course, owners and investors still stand to make profit, but through their actions, local, national and worldwide economies can prosper.
For many people, the risk involved in investing can make the whole process feel a bit like gambling. But, truthfully, there is quite a big difference between the two. And that’s exactly why I decided to write this article. In fact, before we get much further, allow me to answer the very important question, is investing gambling?
No, investing is not gambling. While both involve risk, when you invest your money, you receive ownership of something in return. Gambling, on the other hand, is a wager between two parties that depends on a particular outcome and results in a gain for one, and a total loss for the other.
So essentially, the biggest difference between investing and gambling, is that when you invest your money, you are purchasing something of value. Whereas, when you gamble, you only receive some sort of value if you bet on the right outcome.
But that isn’t the only difference.
That’s why, for the rest of this article, I’m going to take a deeper dive into the top 5 reasons why investing is different than gambling.
Let’s get started!
Table of Contents1. Investments Have Value
As I mentioned at the beginning of this article, whenever you purchase an investment, you receive some kind of ownership in return. For example, when you decide to invest in real estate, you receive ownership of the property you purchase. When you purchase stocks or mutual funds, you receive a portion of ownership in one, or multiple publicly-traded companies. Even when you invest in precious metals (i.e. gold, platinum or silver), which tend to carry a higher-level of risk than many other investments, you receive ownership of the precious metal.
And here’s the thing, in nearly every case, if you invest in something, even if that investment decreases in value, you can still sell it.
That just isn’t the case with gambling.
I mean, if you bet $100 on a particular horse to win the Kentucky Derby, and it doesn’t, you just lost all that money. It’s all or nothing.
Gambling Vs Investing For Dummies
Talk about a big difference between investing and gambling.
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2. Proper Investing Puts The Odds In Your Favor
I don’t think it’s any secret, but when you gamble, especially at a casino, the odds are not in your favor. Unless, of course, you are a casino owner.
You see, the odds in gambling are set to benefit “the house” in the long run. So, mathematically speaking, the longer you gamble the more money you are going to lose.
Meanwhile, as an investor, when you put your money into well-researched, strong investments, the odds of earning a return are in your favor.
For instance, at the time of writing this article, over the last 10 years, the S&P 500 has earned an average annual return of approximately 10% (source). As an investor, I can look at that number and know that it is probably a strong place for me to put my money.
When it comes to gambling, however, those kinds of odds don’t exist over the long-term. Sure, you might win a quick buck here and there, but in the long run, the house always wins.
This is also why people that invest consistently usually end up wealthy, and people that gamble consistently typically end up broke.
3. Compound Interest
As an investor, it is easy to take advantage of the power of compound interest. All you have to do is re-invest your earnings into the same investments that are producing gains, and your money will grow faster and faster. It’s a truly awesome thing to experience.
On the other hand, in order to do the same thing gambling, you would have to win money, and then win more money with the money you already won, and so on. And since the odds are not in your favor, this is an extremely unlikely scenario. And by unlikely, I mean nearly impossible.
4. You Can Diversify Your Investments
Gambling Vs Investing Strategy
If you really want to improve your odds with investing, you have the option of diversifying your investments. For example, you could invest in mutual funds, individual stocks, real estate, and much more.
That way, if one of your investments goes down, and another one goes up, you don’t experience as great of a loss. This is a great way to reduce the likelihood of losing money, and increase your ability to build wealth.
This is not an option when it comes to gambling. Since every gamble carries a high risk of losing money, diversifying your bets would likely only make your odds worse.
5. Humans Play An Important Role In The Outcome Of Investments
The fifth, and my personal favorite, reason why investing and gambling are different, is that humans play a prominent role in the outcome of investments.
For example, when you invest in a company on the stock market, you are putting your money behind executives, employees, and other investors that all have a vested interest in the company earning a profit.
And with all those people working hard to reduce costs, innovate, and grow the company, your likelihood of earning interest on your investment is very good. In other words, humans have the ability to influence the outcome of an investment, which is not the case with gambling.
Truthfully, this isn’t something many people consider when it comes to investing, but it is a critical distinction between investing and gambling. And when you take this critical component into consideration, at least in my experience, investing becomes a much less terrifying venture.
Final Thoughts
Investing and gambling are two very different things. Let’s review:
- With a wise investment strategy, the odds of success are in your favor. Meanwhile, gambling puts the odds against you.
- When you invest in something, you receive ownership in return for your money. Gambling is a high-risk wager, based heavily on chance.
- As an investor, you have the opportunity to earn compound interest. As a gambler, not so much.
- You can diversify your investments in order to lower your risk of losing money. Meanwhile, all forms of gambling come with a high risk of loss.
- Humans play an important role, and can influence the outcome of many investments. Gambling is based on chance.
So there you have it, the 5 key differences between investing and gambling. If you were a little unsure on the subject, I hope this provided you with some clarity. And if you were on the fence about investing, I hope this provided you with a new and positive perspective.
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How Long Should It Take To Build An Emergency Fund?Zach Buchenau is a self-proclaimed personal finance nerd. When he isn't writing about budgeting, getting out of debt, making extra money, and living a frugal life, you can find him building furniture, fly fishing, or developing websites. He is the co-founder of BeTheBudget, and Chipotle's most loyal customer.Leave a Reply
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