Investing vs gambling explained
Many people who have never invested before often compare the stock market to gambling. After all, it has its risks and rewards just like gambling. I remember when I first started investing my finances and friends and family warned me against it saying it’s gambling. It actually made me think is investing gambling?
Although there are similarities between Investing and gambling there are also major differences that if you learn can make your investing experience into a positive one.
- Investing vs gambling explained
- Definition of Investing and Gambling
- Key differences stocks vs gambling
- Is the stock market gambling? – How to not make it a gamble
- Difference between gambling and investing
- Bottom line
- Is Investing Gambling?
Definition of Investing and Gambling
Before we dive any further lets look into some cold hard facts of the definitions of both what it means to invest and gamble.
Investopedia defines investing as
“Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavours, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.”
Where as gambling is defined as:
“Gambling, the betting or staking of something of value, with the consciousness of risk and hope of gain, on the outcome of a game, a contest, or an uncertain event whose result may be determined by chance or accident or have an unexpected result by reason of the bettor’s miscalculation.” source: Britannica
The key take aways from this for me are:
- Investing has the hope of generating profits whereas gambling there is a known factor of risk.
- Gambling is associated with games and contests investing is not.
- Investing is focused on the longer-term gain of profit whereas gambling is a here and now
- In gambling the outcome is determined much more by chance or luck this is much less so with investments as they are much more considered and researched.
Key differences stocks vs gambling
Having both been a consistent investor on the stock market and gambled in the past for me there are some very real differences that should help answer your question:
- Gambling is about emotion usually linked to a sport or team you love, Investing can be emotional but it should not be. Described in the book intelligent investor investing should be linked to facts.
- Investing is a long term decision, gambling is the short term here and now.
- The risk is always stacked against you in gambling, in investing research and knowledge limit your risk
- Investing in places like the stock market have proven history of gains, take the S&P 500 which has averaged returns of 9.2% over the last 10 years. There is no consistency of returns with gambling.
Is the stock market gambling? – How to not make it a gamble
Its seems natural to see that so many people do compare the stock market to gambling because in reality, people do lose money. How I see it, with gambling your gains are weighted heavily on luck.
The way I see it with the stock market luck is less involved, if you are well-reserched investor the market can be on your side more than it’s not.
Here are some starting tips to consider:
Do your homework
If you know nothing about investing then my advice is to first learn the ropes even if you just read one book you will increase your knowledge and chances of success massively. There are lots of great books that even the greats like Warren Buffett recommend that are low cost.
Unlike gambling investing is about taking calculated risks, these risks can only be calculated if you learn about the stock market and how it works and how you make smart investments.
Want more information on how you can do your homework? Check out these articles:
Use a stock advisor service
If you are just starting out and are not sure which Stocks are worth investing in then it’s good to get tips from experts.
You do pay for a service like this but for me, it’s been more than worth it as it has allowed invest in stocks that have delivered good profits.
They literally tell you which stock to invest in and why (with solid research) I choose an established and respected company Motley Fool.
Benefits of using a stock advisor service like Motley Fool are:
- Time-saving – The service comes with 15 starter stocks that Motley Fool invests in and know to be long term good investments.
- Up to date advice from experts – each month you get 2 stock picks based on what is going on in the market so you can invest at the right time.
- They tell you when to sell too – If you go with their advice (which you should if pay for the service) they will also tell you when it’s time to get out of a bad stock.
- The service at the time of writing delivered 566% in returns since 2002 so if you want some sort of guarantee of success then this could help you.
Want to find out more? These links might be useful
Invest for the long term
Constantly buying and selling stocks is no way to operate on the stock market, unless you are a professional day trader. If you are a regular person with a job like me then stick to the long term.
As George Soros puts it:
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Sorossource: https://www.creditdonkey.com/famous-investment-quotes.htm
Firstly, I have to say he is right, the key is to do solid research at the start put your money in to companies you believe in. If you are constantly buying and selling stocks on a whim then you could say that investing is gambling.
To make your investments not a gamble invest for the long term, know that the stock market has its ups and downs. If you learn to ride the waves you will be fine in the long term.
Have a diverse portfolio
Have you ever heard the phrase “don’t put all of your eggs in one basket”?
It’s true for investing, whereas in gambling you might put all of your money on red in roulette this isn’t the case for investing, especially in the stock market. In fact it is encouraged that you set up a diverse portfolio.
Meaning you invest in to lots of different companies, at least 15. Here how this piece of advice stops investing becoming gambling:
- It limits your damages should you choose a company that tanks – It can happen to the best if 100% of your money isn’t tied to just one firm you won’t fall victim.
- Some sectors will be trading up and some down – By having a really diverse portfolio that includes different sectors you will benefit from gains in the market
Use Index funds and ETFs
When you are just starting out if you want a safe bet then Index funds or ETF (exchange-traded fund) are a good place to start. The S&P 500 index fund for example measures the overall success of all of the S&P 500 companies.
This means low risk for you and being able to invest in lots of companies with one stock. Of course, no stock is risk-free even the S&P 500 has had years of losses but it’s backed by good years of gains, it is just known as having the best track record. This is another reason to always play the long term game. See further down for further details on the S&P 500.
Difference between gambling and investing
Hopefully by now you can see that the ball is in your court and investing in the stock market doesn’t have to be a gamble. If you research your stocks and consider carefully before jumping in then the stock market is far from a gamble. I would describe more as a calculated risk.
Factually of course people loose money but if you are in the stock market for the long run you are much more likely to have gains. Consider preparing yourself well before jumping in and you will be far from a gambler.
I can see why most people would think is investing gambling but once understood investing has some very key differences that I have laid out in this article.
If you enjoy to gambling this could help your risk tolerance in the stock market however it should be understood that like gambling the risks on the stock market are real but can be limited by making calculated investments and following some of the advice given in this article.
This is contrary to gambling where the risk always stays the same and the common saying “the house always wins” can be very true.
It will be interesting now that cryptocurrency is on the rise if the stock market will be seen as the safe bet in the coming years!
What do you think? Is investing gambling to you? Let me know in the comments below.