Investing and gambling appear to be similar activities on their faces. Essentially, you’re throwing money in a pot and praying that you see a return on your capital, risking your pocket change (or your life savings) for a chance at riches. However, there are several key differences between investing and gambling.
Investing is where you buy and sell stocks and other assets with the intent of seeking financial return. These may take the form of asset appreciation, income from dividend payments or additional stock.
The concept of risk versus return is one of the basic tenets of investing. Usually, lower-risk investments generate lower returns, while higher-risk investments offer bigger profits – assuming you don’t lose your entire investment.
Gambling, on the other hand, is where you stake capital on the outcome of a particular event. Typically, this involves taking on big risks based on chance and uncertainty, and your money isn’t buying any assets
The point of putting capital to work is to hopefully generate profits without piling on the risks. However, when you look at the difference between investing and gambling, it’s clear that one is far riskier than the other.
Casinos are, by default, in business to make money for themselves. Thus, accepting a wager means entering an agreement in which the house maintains a mathematical advantage that increases with every next bet. While long odds don’t mean gamblers can’t win, they do mean that a gambler’s chances of seeing their capital again reduce drastically with every play.
On the other hand, your financial investments maintain a vested interest in seeing you do well. After all, your stock goes up when the companies perform well over time. Thus, while not every investment generates returns year over year, your odds of “winning” actually go up the longer you participate in the market. On average, a well-diversified investor will see up to 10% returns annually.
Investing allows you to limit your losses at the earliest sign of danger. For instance, you can set a stop loss, or an order to sell your investment, as soon as it drops beneath a preset price point. While you’ll still take a financial hit, you can cut your losses early and retain the bulk of your capital.
On the other hand, what you wager in gambling is what you lose in gambling. So, if you bet $10,000 on Lucky Day at the racetrack, and he comes in dead last, you’re out $10,000. There is no stop loss to save you from a risky bet – no matter how great the potential reward.
With investing in the public markets, all relevant financial information is legally required to be available to you. The company issuing the stock will put out a financial report once every quarter – a report which will promptly be digested by dozens of analysts offering their interpretation of the data’s context.
With gambling, however, there is no way to research which slot machine is most likely to give you the big payout (here’s a hint: probably none of them). Nor can you ask your favorite horse how their leg feels today, or your blackjack dealer if the cards are shuffled in your favor. This built-in disadvantage further highlights the risk you take putting your money in the hands of a bettor.
Gambling is almost always a short-term event. You play a wager on an activity, game, or outcome, and when the outcome has been realized, you either win big or accept your losses.
With investing, on the other hand, it’s not uncommon to see an individual hold an asset for years, or even decades, while the asset appreciates. In the stock market, time provides another valuable advantage to investors: compound interest, or the interest you earn on your interest.
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