Investing vs. Gambling Explained
Many people who have never invested before often compare the stock market to gambling. After all, Investing involves risk and reward, just like gambling. When I first started investing in my finances, 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.
Definition of Investing and Gambling
Before we dive any further, let's look into some cold hard facts of the definitions of both what it means to invest and gamble.
Julia Andrews
-designer-
Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur.
Whereas 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 because of the bettor's miscalculation.” source: Britannica
The key takeaways from this for me are:
Key Differences Stocks vs. Gambling
Having both been a consistent investor on the stock market and gambled in the past, there are some genuine 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. As described in the book, an intelligent investor investing should be linked to facts.
- Investing is a long-term decision. Gambling is the short-term here and now. Stock prices fluctuate over time, so you need to be in the long term to make a substantial gain.
- The risk is always stacked against you in gambling; investing, research, and knowledge limit your risk.
- Investing in places like the stock market has proven a history of gains; take the S&P 500, which has averaged returns of 9.2% over the last ten years. There is no consistency of returns with gambling.
Is the Stock Market Gambling? – How to Not Make it a Gamble
It seems natural to see that so many people compare the stock market to gambling because, in reality, people lose money. As 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 a well-researched 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 first to 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, how it works, and how you make smart investments.
Want more information on how you can do your homework? Check out these articles:
Best ways to learn about investing
Use a Stock Advisor Service
If you are just starting and are unsure which Stocks are worth investing in, it's good to get tips from experts. There's a lot more to learn about investing than a company's stock price.
You do pay for a service like this, but for me, it's been more than worth it as it has allowed investment 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:
Want to find out more? These links might be useful
- Motley Fool Stock Advisor Review
- Motley Fools Vs Zacks
- Get 50% off Motley Fool Stock Advisor with my recommendation link
Invest for the long term
Personal finance 101 is about investing 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.
“If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring.”
Firstly, I have to say he is right. The key is to do solid research at the start put your money into companies you believe in. If you are constantly buying and selling stocks on a whim, 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 Diversified Portfolio
Have you ever heard the phrase “don't put all of your eggs in one basket”? Stock trading should be made up of a well-diversified portfolio.
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 lots of different companies, at least 15. Here is 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
If you want a safe bet, index funds or ETFs (exchange-traded funds) are a good place to start when you are just starting. 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 always to play the long-term game. See further down for further details on the S&P 500.
Is it Better to Invest or Gamble?
Stock investors don't really ask this question, but those who dont invest.
Retirement plans in a company can match the amount of income a client saves at certain times. Companies give you 50% or even 100% of your contributions (up to a certain limit). Not all company retirement plans are the same, and there's much more to participate in the retirement plan than that mentioned. Take a closer look at your business plan. If you don't participate, you've put money on the table. If you don't participate, it is not a good investment opportunity promising to yield a 50% return on your invested money. Better or more, 100% on your money.
Here are Some Investing Situations to Avoid
You really want to stay away from risky investments, those that seem too good to be true usually are! Here are a few red flags you should watch out for when investing.
Concentrated stocks
This is when an investor holds a significant part of a stock. Consider it the opposite of diversification. If your entire asset is linked to a stock held by this one organization and something goes wrong, it means you potentially lose it.
Selling Stocks Short
You are essentially borrowing shares of stock, immediately selling the shares you don't own, and hoping the value of the stock drops. You then can sell the share back at a lower price and thus keep the balance. You will additionally be asked to repay interest for loans on shares that were borrowed.
Investing in companies with unstable financials
If the company's financials are very erratic, it may indicate they are experiencing problems. How do you know if a company is having financial problems? A few signs of impending bankruptcy include: If a company has any of these symptoms, particularly if they have more than one, you should probably avoid that company.
Investing in companies like this can be very risky, not to mention expensive. If the company goes bankrupt, you could lose your investment completely. The trick is to identify which ones will go bankrupt while there's still time (
Investing in penny stocks
Penny stocks are low-priced shares of small companies. The price per stock is typically less than $5 and can be as low as a few cents. Penny stocks should not be confused with microcap stocks, which have a market capitalization between $50 million and $300 million.
They trade over the counter (OTC) instead of on a major exchange like the New York Stock Exchange or the NASDAQ.
Some of these companies are scams and engage in pump-and-dump practices – this is where they bribe people to buy their stock, then "dump" it into the market, driving up the price. Once prices reach a certain point, they sell their shares off at a profit – and you're stuck with the stock.
The companies that remain after this scheme often don't have much value and can be subject to corporate fraud and embezzlement (a company official steals the company's money). Penny stocks are top-rated among those who run Ponzi schemes. The people running these scams
Investing in companies with high levels of debt
There is a saying that goes, "debt is the worst kind of poverty," and it's true. While debt may be good for companies, excess debt can sink a company under its own weight. If a company has been accumulating too much debt without making any effort to pay it down, it could be in serious trouble unless there's some.
Investing in a company without doing any research
If you're considering investing in a company, it's best to go into the situation with some background knowledge about that company. You can check out their website or speak to people who have invested in that company before. Some of the most important questions to ask are "What is it they do?", "How did they make so much money?"
Difference Between Stock Market Gambling and Investing
Hopefully, you can see that the ball is in your court by now, and investing in the stock market doesn't have to be a gamble. If you research your stocks and consider carefully before jumping in, the stock market is far from a gamble. I would describe it more as a calculated risk. Seek the advice of a financial planner if you want further advice a about investing strategy.
Factually, of course, people lose money, but if you are in the stock market for the long run, you are much more likely to have gained. Consider preparing yourself well before jumping in, and you will be far from a gambler.
Investing Vs Gambling Bottom Line
I can see why most people would think of investing in gambling, but once understood, investing has some key differences that I have laid out in this article.
If you enjoy 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.
take investment advice if you are unsure and use the advice to come up with your investment strategy
It will be interesting now that cryptocurrency is rising if the stock market will be seen as a safe bet in the coming years!
What do you think? Is investing gambling to you? Let me know in the comments below.
Great article! I definitely have had people tell me I am gambling money that I am investing.
Glad you liked the article Alex – Thanks 🙂
very good put up, i actually love this website, carry on it
Thank you 🙂