Is investing gambling? The line between assets and bets
Many people don’t see the difference between gambling and investing, and that’s a huge mistake. It’s easy to make this assumption because people can lose money in both. Investors and gamblers take calculated risks, but they cannot guarantee profit.
What is the major difference between these activities, then? If you look closely, you can distinguish them from each other based on the goals that direct them. What goes on in the mind of a gambler vs. an investor? Let’s discuss further to find out!
First, I will elaborate on why people often mistake gambling for investing and the other way around. Then, I will share more details about the differences between investing and gambling. More importantly, we will discuss why starting an investor’s portfolio nowadays is a good idea.
Are stock market gambling and investing the same?
It’s easy to assume that the stock trading floor and the casino floor are virtually the same, especially if you focus on the surface-level qualities.
Let’s take trading stocks and playing poker as examples. Stocks represent ownership of a company, while poker chips may stand for the amount of money you’re betting.
Gamblers and investors take calculated risks by performing certain actions. If a poker player feels confident with their set of cards, they might increase their opening bet by calling a “Raise.”
If they’re iffy about their hand, they might end betting by calling a “Foid.” On the other hand, the stock investor may buy stocks that are likely to grow in the future.
Meanwhile, they might sell stocks in their portfolio if they think those will drop in value soon. Despite all the fancy terms, the risk of losing money hangs over the gambler and the investor.
You put money on the line for both of these activities, but you’re not 100% sure that you will profit. Those outside the gambling and investing scene may easily dismiss both as the same.
Take a closer look at each one, and you will see glaring differences. Understanding them is important for those who want to start building a portfolio.
What is gambling?
Let’s now talk more about gambling. I used the poker card game as an example because people often associate this activity with casinos. Yet, it comes in several forms, such as:
- Fantasy Sports – Some sports fans create their dream team consisting of players who often come from different real-life teams. Then, they bet on how likely their fantasy team will win against another person’s made-up team. Some of the major names include DraftKings and FanDuel.
- Lottery – You may have seen folks line up to buy tickets for this. They would enter a certain combination of numbers, so they could get a chance to win the jackpot.
Gambling even has a separate definition from investing. It means “wagering something of value on an event with uncertain outcomes to win another thing of value.”
Has other characteristics that set it apart from investing. Those take a while to explain, so I dedicated a separate section for each of them:
#1. It’s based on luck.
People easily get into gambling because it’s often just a game of chance. You could look into how the games work, but that won’t help raise your odds of winning.
Just crank the lever, and see if the slots line up. Once you have your cards, all you can do is adapt to that set. You don’t have that many strategies to even the odds.
Some professional gamblers may employ strategies to do this, but they’re extremely difficult. They often get caught, often causing them to get banned by nearby casinos.
Unfortunately, this is what excites a lot of people. Worse, many of them become addicted to the thrill. The promise of short-term profit leads to long-term personal finance issues.
Read More: Investing For Dummies 101
#2. You just bet, make, and lose money.
Gambling involves allocating a specific amount of money so you get the chance to make more. On the other hand, investing involves buying and selling assets to make money later.
Doesn’t this make investing into gambling, except it has extra steps? That may seem true until you realize that an asset can provide features while you’re holding it.
This means just holding the asset can be rewarding! We will talk more about the benefits of holding certain assets later.
#3. Gambling is riskier than investing.
This statement shouldn’t undermine the risks of stock investing and other similar methods. Instead, you should focus on why you’re more likely to lose money on gambling.
It’s often a “zero-sum game.” This means the winner takes all the prizes while the other players lose money. There is no way to recoup your losses.
Some gamblers try to compensate for a bad game by playing more. Unfortunately, they often end up just giving up even more money. Worse, a few may drive themselves into bankruptcy!
#4. Gambling focuses on the short term.
You often buy lottery tickets or bet at the casino to make a lot of money right there and then. Gamblers often don’t plan for future goals when playing.
Investing in the stock market is also a way to make more money, right? However, an investor often needs that money for a long-term objective, such as retirement.
It’s not a good idea to build a fund for your future years by playing cards. As I said, people play betting games for the thrill, not exactly for any overarching purpose.
#5. Gambling spends on things with little to no value.
This activity often involves paying for raffle tickets, poker chips, or similar items. They may represent your money, but they don’t have real uses outside the game.
This means that your strategy just aims to make it big in no time. On the other hand, true investing does not have a goal in mind.
That’s why some people refer to investments as “assets.” For example, a stock is part-ownership of a company with real-world value. Contrary to popular belief, this also applies to cryptocurrencies!
What makes “investing” different?
Others choose to make more money later by investing. Besides the stock market, you can choose a wide range of assets for your portfolio, such as:
- Real estate – You could buy homes to sell them for later. Crowdfunding is a more affordable option that lets you invest as little as $500 for a property’s renovation or funding.
- Bonds – Do you remember the “IOU” cards you gave friends when you were a kid? Bonds work because they are debts you can purchase. Governments and companies use this to build more funds while people get a source of passive income.
- Precious metals – Many investors swear by gold and other precious metals for the best inflation hedges. In other words, they may help you protect your finances against rising commodity prices.
- Exchange-traded funds – Some companies allow investors to buy a bunch of assets in one package called an exchange-traded fund or ETF. This may include stock market options, bonds, and even cryptocurrencies!
- Cryptocurrency – You may know this as Bitcoin because it’s the most popular. It’s a digital asset representing value, much like fiat currencies. Cryptos also have other features, such as non-fungible tokens (NFTs).
Gambling also has different forms, but it doesn’t provide the same benefits. Let’s look at how investing sets itself apart from this activity:
#1. It’s based on research.
Real investors don’t fall for hype when choosing assets. Trends are just one factor that these people consider. They also check others like the news and the past performance of assets.
Investors also learn how their assets work, so they can minimize risks and maximize benefits. That way, they can choose the ones that are likely to continue making money despite other conditions.
On the other hand, gamblers just get information from the ones available in the games. That’s all they can work with, so they only had two choices: win or lose it all.
#2. Investors can do more with assets.
Did you know that investors can make money even while the stock market is crashing? That’s because people can employ several methods to boost profits and reduce risks.
For example, stock market investors may short sell a share after buying it. If the value drops below the purchase price, the investor may compensate for losses or still make a profit.
This isn’t possible with gambling because all you can do is change how much you allocate. That’s why it’s not a good idea to use it for long-term objectives.
#3. Investing is safer than gambling.
Investors use research to find the best assets and strategies. An uncertain outcome is still possible, but at least they can do so much more with their assets.
Their most well-known rule of thumb is forming a well-diversified portfolio. Novice investors may think this means buying every asset they can. Experienced ones know that it means being selective.
This means taking certain factors like market volatility into account. This lets investors buy assets that may grow even if their other options decline.
#4. Investing often focuses on long-term personal finance.
You can find so many people who promote investments towards wealth creation and financial freedom. Let’s use the stock market again as an example.
Let’s compare it with planting a tree. It starts as a sapling then becomes a fruit-bearing tree after several years. That way, it can feed you in the future. The same principle applies to investing.
You buy shares while the stock price is low. As time passes, you’re building wealth as the value increases. After a few years, stocks can provide financial security for your senior years.
Retirement plans like Roth IRAs work similarly for personal finance. Still, market fluctuation can get in the way of price appreciation. In other words, this still poses some risks.
#5. Investing spends on valuable things.
When you invest in stocks, you can own part of a company. If you invest in real estate, this usually means you purchase properties to sell them later.
Unlike gambling, you don’t pay for useless items like lottery tickets. If you’ve heard of crypto, you may have heard people dismissing crypto investing as gambling.
Contrary to popular belief, cryptocurrencies have real-life use-cases. It’s just that the scams often gain more online traction. You just have to be careful when picking cryptos.
Do you know the most important asset in investing? It’s yourself because you are the one who benefits from your assets in the end. Not doing so is gambling your financial future.
It’s much riskier to go through life without assets’ safety net. If something goes wrong, investors are more likely to have something to support your financial needs.
Note that this article is not meant as investment advice. Learn all you can about assets and plan them carefully before investing.
Disclaimer: This article is the author’s personal opinion, which may differ from the “official” statements or facts.