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Is Investing Gambling Or Does It Actually Make Sense?

Is Investing Gambling Or Does It Actually Make Sense?

April 27, 2022 By Support from Fervent Leave a Comment

With the rise of accessibility to investing, with various investment apps being introduced to facilitate it, there’s arguably never been a better time to start investing your money. But is investing gambling or does it actually make sense?

It can certainly be an exciting process to see your investments appreciate in value, spurring further motivation to find your next winning opportunity.

Despite this rise, there is still a large misconception among many people that investing and gambling are essentially the same thing.

Or, that investing is only available for a select group of people, such as wall street bankers, to take advantage of.

Fortunately, this stereotype is quickly disappearing, with many ‘ordinary’ people making smart financial decisions by learning and then implementing their knowledge to grow their wealth through investing.

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However, if you’re still sceptical and need clarification about the differences between investing and gambling, we’ll cover just that in this article.

We’ll start by comparing the definitions between the two, go more in detail as to how exactly they differ, before finishing by evaluating whether some popular and newer investment strategies such as individual stock trading, cryptocurrencies and day trading could actually be considered gambling.

Ultimately, we want to aid your financial decision making by, hopefully, informing you as much as possible of each of the investment options listed above.

Table of Contents hide
1 The Difference in Definitions Between Gambling and Investing
2 How Does Gambling Differ From Investing? 4 Key Differences
2.1 Your Exposure To And Control Over Risk
2.2 Your Ability to Analyse and Retrieve Information
2.3 The Time Difference Between Them
2.4 Mitigation of Loss Potential
3 What About Riskier Types Of Investments? Are They Considered Gambling?
3.1 Individual Stocks
3.2 Cryptocurrencies
3.3 Day Trading
4 Wrapping Up

The Difference in Definitions Between Gambling and Investing

Let’s start by clearly differentiating the two terms.

Oxford Languages defines investing, in the context of finance, as putting money “into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit”.

Conversely, gambling is defined as “tak(ing) a risky action in the hope of a desired result”.

So, at first glance, you wouldn’t be blamed for thinking these are very similar in nature, with investing more specifically implying money being put into a financially related product, rather than a general one with gambling.

How Does Gambling Differ From Investing? 4 Key Differences

Without having more in-depth knowledge, it certainly isn’t far-fetched to think that investing is simply a ‘fancier’ way of gambling.

So what is the key main difference? Investing tends to be a calculated risk, whereas gambling is mostly a game of chance.

The points below will illustrate what exactly this point means in more detail.

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Your Exposure To And Control Over Risk

Whilst it’s true that both gambling and investing involve risk, generally, investing gives you more control over how much risk you want to expose yourself to.

Low-risk investments typically result in lower returns, while high-risk investments are usually accompanied by higher risk.

Investors usually create a portfolio of assets to allocate their money to, which they can then use to decide how much of their money they want to risk.

Investors have different strategies they tend to stick to, with some opting to allocate a larger portion of their portfolio to a particular asset class (perhaps because they’re very knowledgeable on the asset and/or the industry it exists in), while others orientate and encourage a diversification across various different asset classes to mitigate any sizeable losses if one particular asset were to dip.

This is known as an investment risk management strategy. As you can see, investing tends to be associated with planning and intention.

Conversely, traditional gambling, by nature, gives you less control over your risk exposure. With the exception of professional gamblers (who can be argued to be more like an ‘investor’ explained above), gamblers tend to adopt a ‘high risk, high reward’ mentality, with the odds generally being stacked against them before a bet is even placed.

The Financial Times phrases this investing vs gambling risk difference brilliantly –

“Would you rather have £100 or a 50/50 chance at £200? If you take the £100, you’re an investor. If you go all or nothing, you’re a gambler”.

Note that from an academic standpoint, there is no difference between the two options since they both have an “expected value” equal to £100.

In practice/reality, the two options are very different.

Your Ability to Analyse and Retrieve Information

Although both investors and gamblers study previous and current performance to improve their chances of making a future profit, a large difference between the two is the availability of information.

Any publicly listed stock or asset class has all of its information readily available to be searched online by the public at any time.

This information tends to include, financial ratios, management teams, and company earnings, all of which can be researched and studied before investing.

In contrast, with most gambling games, you have no prior information about what happened an hour, a day, or a week ago at that particular table, besides maybe whether a table is either hot or cold (which isn’t a reliable or objective method to identifying risk anyway).

What’s more, depending on the game being played, each ‘bet’ is typically independent of the other, so very little information can be used to make an informed decision with your money.

The Time Difference Between Them

Investing in the stock market, for most investors, is a long-term strategy as they’re generally predicting that the value of their stock(s) will appreciate over time.

A longer span of time tends to increase your odds of retrieving positive returns.

What’s more, investors who purchase shares in companies specifically can enjoy dividends that are paid out by the company to reward the investor for staking their risk in them.

Consequently, regardless of whether the actual value of a company’s stock has either appreciated or depreciated, as long as the company has made a profit, it’ll likely pay the investor a dividend.

Smart investors realise that dividend returns over a longer period of time are a key component in growing their wealth long term (so long as the company continues to make a profit).

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Gambling, however, is usually a short-lived activity. This is because gambling also has another major purpose; entertainment.

Participating in gambling usually gives you a dopamine hit, making you feel euphoric every time you earn a quick win.

The short-lived nature of gambling also largely favours the house, putting gamblers at an immediate disadvantage even before betting.

With long-term investing, you’re spreading your odds across a longer timeframe, which will inevitably give you a higher chance of making a positive return.

Whereas with gambling, it’s rarer to ‘hit the jackpot’ consistently to earn a consistent profit.

With gambling, once the game or race or hand is over, your opportunity to make a profit is gone. You either have won or lost your money.

Mitigation of Loss Potential

Another major difference between investing and gambling is that with gambling, you have fewer ways to limit your losses.

There generally aren’t as many loss-mitigation strategies within gambling.

The main ones that have been recently introduced by bookies are partial cash-out options, but even those aren’t entirely reliable, as you usually have a very tight time window to withdraw your money before these options disappear.

Additionally, even if you do win a bet, most wins are minimised because of the points spread, which dictates how much money you win if your, for example, team, doesn’t win by a certain number of points.

Investors, on the other hand, have a variety of options to prevent the total loss of their investment.

An investor can set a stop loss that will automatically sell their stocks at a particular price before it drops even lower.

For example, if a stock drops 10% below its purchase price, an investor has the opportunity to sell that stock to someone else and still retain 90% of their investment.

Investors can also implement hedging strategies that utilise derivatives (e.g. stock options) to further mitigate losses.

What About Riskier Types Of Investments? Are They Considered Gambling?

What if we consider riskier ‘investments’ like individual stocks, cryptocurrencies, and day trading?

Are they considered gambling?

Let’s take a look.

Individual Stocks

Individual stock trading means buying a single stock of a company or asset class, as opposed to a group of them through a mutual fund.

Main Pro? Reduced fees

The main advantage of buying individual stocks is the reduced fees in that there are no fund managers to pay.

With mutual funds, you must pay management fees each month to cover the time and effort the fund does when choosing and managing it on its investors’ behalf.

With an individual stock, you pay a single fee when you buy and sell it.

Whilst your money is invested, there are no additional costs to managing it in the market.

Main Con? Less diversification potential

The main drawback of individual stocks is that it’s often a lot harder to achieve a healthy balance of stocks and asset classes.

Whilst you almost automatically achieve this whenever you invest in a mutual fund, in comparison, you’d need to invest in between 20-100 individual stocks to achieve adequate diversification.

Investing in 20 or more stocks has generally been shown to minimise unsystematic risk.

Therefore, the fewer stocks you own, the more risk you’re exposing yourself to.

Comparable to gambling?

Despite the main drawback of reduced diversification, individual stock investing is clearly not in any way comparable to gambling.

Individual stocks are still covered by all the key differences mentioned above, such as the ability to better mitigate losses, increase the chances of profit through a longer time frame and dividends, and your ability to analyse their previous and current performance to predict a future greater return.

If you’re wondering how you can go about doing that, we’ve got a separate article on how to evaluate a stock.

Cryptocurrencies

Cryptocurrencies seem to be all the hype at the moment – but are they actually viable investment opportunities?

Although there is a plethora of information out there on them, the bottom line is that these new financial technologies are still at the moment very risky.

Main Pro? Larger gains in shorter time periods are possible

Perhaps the largest advantage of cryptocurrencies is their freshness. As a result of not being around for too long, investors are able to make large gains in relatively short periods of time.

Consequently, some people have managed to become ‘crypto millionaires’ in seemingly very short periods of time.

Main Con? Larger probability of high losses

Unfortunately, cryptos’ newness acts as a double-edged sword with its biggest drawback: high volatility and loss potential. Unlike stocks, cryptocurrencies don’t have a long track record and so haven’t been through the various boom and bust economic cycles that are typically seen within the stock market.

If you’re a risk-averse investor, it may be best to steer clear of cryptocurrencies for now.

Comparable to gambling?

Although highly risky, and perhaps the closest type of investing to gambling, cryptos still have many factors that make them more of a calculated risk, as opposed to a game of pure chance.

For instance, you can still research cryptos to evaluate their future value potential, as well as put stop losses in place to mitigate any losses.

However, because of their high volatility and lack of knowledge, many people ‘invest’ in cryptos blindly because they think they can earn a large profit quickly (sound familiar?).

Day Trading

There is often a common misidentification between being a ‘trader’ and an ‘investor’, which is an important distinction if we’re to identify whether day trading can be considered gambling.

Traders take advantage of short-term price discrepancies in the market and capitalise on short yet volatile changes in a stock’s price.

They act quickly and reactively to movements within the stock market.

Conversely, investors tend to be long-term visionaries, putting money into stocks and assets they believe will return a greater return in the long run.

Main Pro? Quick gains

As opposed to long term investors that tend to wait months and years to see a steady return on their investments, day traders can see instant returns by capitalising on the volatility of a stock. This is true in theory, anyway.

Main Con? The effort and patience required to make those aforementioned gains

Don’t mistake day trading for instant money. Much of it relies extensively on luck. And the empirical evidence consistently shows that it is not possible to earn abnormal returns from day trading.

What’s more, most day traders spend hours at a time tracking stocks to invest in, which usually takes a large amount of prior research, only to make an, on average, 1-5% gain per trade.

These returns often go to 0 or negative when one considers the effects of transaction costs and taxation.

Comparable to gambling?

In a nutshell, yes – day trading is akin to gambling. But note that it is not investing.

Wrapping Up

So, in summary, is investing gambling? To a certain degree, yes. Although both require a certain element of risk to make gains, investing is associated with more planning, analysis and intention than gambling, which tends to be luck and chance.

Although newer ways of investing such as cryptocurrencies and day trading are risky due to their volatile nature, they’re still not considered gambling in their original context, because there are more factors that can be incorporated to predict a future return in them.

Filed Under: Finance, Investing Fundamentals

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