Introduction
A sure route to making the most out of your money and creating wealth is to invest in the stock market. However, if you are new to the world of investing, identifying safe investments and figuring out where to invest money can seem like a scary task! In fact, to a beginner, it may seem as if investing is very much like gambling in a casino.
But both gambling and investing have choices and risks while having the potential to multiply your money manifold. But if you are a beginner, you might find these terms intimidating and end up confusing one for the other! So, you must understand them and make an informed decision as to where to invest.
The first and foremost question that we all have is: are they the same?
What Is Investing?
Investing is the act of parking your money in different types of assets, such as stocks, real estate, business ventures, etc., with the expectation of generating an income or profit.
The different kinds of investment depend on the duration of investment and risk factors. As an investor, you can choose investment options that allow for short-term, medium-term, or long-term gains, depending on your affinity, and risk appetite.
Before investing your money in an asset or activity, it is a general practice to learn as much as possible about the asset and estimate potential returns. Investing for beginners is made easier with readily available beginners’ guides from credible sources. But, if you don’t have the patience to learn everything on your own, you can always opt for ready-made portfolios.
What Is Gambling?
With gambling, there’s no scope of finding helpful guides or ready-made portfolios. Gambling is the act of betting your money on some kind of possibility or event. Since the event’s outcome is subject to chance and is usually uncertain, gambling becomes less about learned moves or skill application and more about odds.
Also, the risk quotient increases because once the event is over, winning or losing is absolute and finalised once the event is over. There are no partial losses or wins!
That’s why professional gamblers learn risk management to decide the amount of capital to gamble with at every stage. Gamblers also try to study their opponents or the game before putting in their bets to better understand the odds of a favourable return.
But beyond that, gambling and investing are very different.
Differences Between Investing and Gambling
- Time Horizon
A vast difference between investing and gambling is the time horizon. Gambling is a limited-period, event-bound activity. The moment the event is over and its outcome is defined, the act of gambling is concluded. Sometimes, the whole gamble can end within minutes!
By comparison, investments have a much longer time horizon. So you have the option to stay invested in a particular stock or asset for years or even decades. Of course, short-term investments and intra-day trades are also possible. Still, if you follow the trading rules, your investment opportunity will rarely be limited by a single event.
- Risk Minimisation
With both investing and gambling, you are supposed to look out for profit maximisation and risk minimisation. While you have the reins to control with investing, it’s not the case with gambling. You can always define a stop-loss strategy and sell off an investment that is not giving you expected returns.
On the other hand, when you gamble in a casino and bet against the house, your expected returns can be anywhere between -0.5% to -5%. Technically, the house always has an advantage, and the more you play, the more you are likely to lose. And your losses are absolute, which you can’t cut even by quitting midway through a gamble!
- Need for Skill
Even though the outcome depends largely on chance, professional gambling requires experience and skill. To increase your chances of winning, you have to study your opponents and the odds long before making a bet.
Investing doesn’t depend on any particular skill set. Anyone can learn to be a profitable investor. Successful investment in the stock market requires knowledge and study of the companies and financial instruments.
- Availability of information
Another thing that sets investing apart from gambling is the availability of information to make an informed decision. All the information that an investor seeks about a stock or asset is available in the public domain. You can find out about a stock’s historical performance and profitability projections by going through the company’s annual report.
But information is rare to come by when it comes to gambling. Even though you can know the pedigree of the horse you are betting on or the opponents you are playing poker with, the credibility and reliability of the information remain questionable.
- Diversification
When investing, diversification is an accepted strategy to reduce risk and maximise returns. You can invest in different asset classes and diverse opportunities within the same asset category at the same time. If one investment doesn’t perform well, the others can cover its losses.
But when gambling, diversification doesn’t protect you in any way. If you spread your risk capital across multiple gambles, you reduce your reward potential rather than mitigating your risk.
So, in essence, investing is very different from gambling.
But What About Speculating? Is It the Same as Gambling?
Speculation in the stock market means trading high-risk financial instruments to realise substantial returns. When price movements of securities are frequent and volatile in the market, traders try to take the maximum advantage of the situation by calculative speculation.
Investing may seem like a gamble to an outsider. But those who participate in stock market trading with adequate knowledge and make it their business base their decisions on information rather than intuition!
Conclusion
Finally, in the famous words of Peter Lynch, “If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.”
Therefore, to those who continue to invest without studying the market, investing will always remain as unpredictable as gambling. But if you are in it for the long game and increase your potential for high returns, then help yourself with a beginner’s guide and learn investing for beginners.
You might also Like.
Analyzing the Conundrum of Index Funds vs Mutual Funds
Table of Contents Analyzing the Conundrum of Index Funds vs...
