A lot of times during financial discussions, you may hear someone quipping that investing in stocks is just gambling. True, both gambling and investing in the stock market involve an element of risk. In both cases, you put your money on the line hoping to make a more substantial return. Both gamblers and stock market investors risk their capital on events that have an uncertain outcome and, to varying degrees, depend on chance.
They also have to assess their risk and expected rewards, then decide whether to call or fold, buy or sell. But apart from these similarities, can we classify investing and gambling as two sides of the same coin?
Investors commit capital or allocate funds to an asset, such as stocks and bonds, with an expectation to get a return on their investment. The protection of money against inflation and the expectation of returns or value appreciation are the primary drivers of stock market investing. In investing, risk and reward go hand-in-hand. Low-risk investments typically generate lower returns.
Likewise, riskier investments have more income-generating potential. Investors must always know how much of their capital they will risk in any particular trade. They’ll also frequently diversify their investments across different types of assets. For example, during an economic boom, an investor may put some of their money in real estate, then spread their risk and investing in gold.
Before putting their money on the line in a bet, gamblers typically try to focus on finding suitable strategies for their chosen game, whether it be roulette, keno, poker or blackjack. Sports bettors on the other hand, research team or player histories, greyhound bloodlines, and head-to-head statistics. In a similar fashion, stock market investors try to leverage charts to predict how the market will move. Seeking an edge, new online casino players will consult with experts before playing in non Gamstop casinos or other unknown avenues. Investors also follow a similar trend, as they search for stock market tips from industry gurus.
Investing vs. Gambling: Key Differences
Both investors and gamblers study past and current information to determine which bets or investments have the best winning chances. However, the sources and quality of the available information are poles apart. Investors have stock and company information, including financial ratios, earnings, and management teams as public knowledge.
Granted, sports bettors have access to similar information, but when you sit at a roulette or blackjack table, you have very little information on the game history. Most times, even if you do, the game outcomes in gambling are totally independent of previous events. But that’s not all—if you follow the money, you’ll uncover some key differences between gambling and investing in stocks.
Follow the Money
When you place a bet at an online casino, you don’t become part-owner of the establishment. Stock traders, on the other hand, own a share of the companies that they invest in. In fact, some companies offer investors a share of the profits in the form of dividends. Also, the stock market appreciates in value over time, which means no one has to lose for another trader to win. In sharp contrast, gambling is a negative sum game. This doesn’t mean that all gamblers will lose, or that all traders will win. But because of the house advantage, from the cumulative amount that all the gamblers in a casino wager, they’ll walk out with less.
Another key difference between gambling and investing in the stock market is your ability to mitigate risk. If you bet £1000 on Manchester United to win the EPL or for the roulette ball to fall on 10 and get a negative outcome, then you’re all out of coin. Sports punters may use live bets to recover some of their money, but only to a minute extent. Most gambling activities don’t have any loss-mitigation strategies. In contrast, stock market traders and investors can use various tools to limit their losses. For example, they can set up a stop-loss, such that if a stock price falls by 10% of its value, they can sell it and keep 90% of their capital.
The Time Factor
Unlike investing, which can last several lifetimes, gambling is usually a short-lived activity. You can bet on the outcome of a slot machine or roulette wheel spin, football match, hand of cards, and more. This time-factor not only affects your ability to respond to changes in the market but to also make better, more informed choices.