Investing vs. Gambling
Both investing and gambling involve risking capital in the hope of making a profit.
In gambling and investing, a key principle is to minimize risk while maximizing reward.
Players have fewer ways to mitigate losses than investors.
Investors have more sources of relevant information than gamers.
Over time, the odds will be in your favor as an investor and not in your favor as a player.
Investing vs. gambling: main differences
In gambling and investing, a key principle is to minimize risk while maximizing profits. But, when it comes to playing, the house always has an advantage - a mathematical advantage over the player that increases with the time they play. In contrast, the stock market is constantly appreciating over the long term. This doesn't mean that a player will never hit the jackpot, nor does it mean that a stock investor will always enjoy a positive return. It's just that over time, if you keep playing, the odds will be in your favor as an investor and not in your favor as a player.
Another key difference between investing and playing: you have no way to limit your losses. If you pony up to $ 10 a week for the NFL office pool and you don't win, you're out of all your capital. When you bet on a pure gambling activity, there is no loss mitigation strategy.
In contrast, stock investors and traders have a variety of options to avoid the total loss of risk capital. Setting a stop loss on your stock investment is a simple way to avoid undue risk. If your stock drops 10% below its purchase price, you have the option of selling that stock to someone else while retaining 90% of your risk capital. However, if you bet $ 100 that the Jacksonville Jaguars will win the Super Bowl this year, you won't be able to get some of your money back if they just make it to the Super Bowl. And even if they won the Super Bowl, remember this point spread: if the team doesn't win with more points than the bettor gives, the bet is a loss.
The time factor
Another key difference between the two activities concerns the concept of time. Gambling is a time-limited event, while an investment in a business can last for several years. With gambling, once the game, race, or hand is over, your opportunity to profit from your bet has passed. You have either won or lost your capital.
Investing in stocks, on the other hand, can be time-consuming. Investors who buy shares of companies that pay dividends are actually rewarded for their risky dollars. Companies pay you money regardless of what happens to your venture capital, as long as you keep their stock. Savvy investors realize that dividend yields are key to making money in stocks over the long term.
Both stock investors and players look to the past, studying historical performance and current behavior to improve their chances of success. Information is a valuable commodity in the gaming world as well as in equity investing. But there is a difference in the availability of information.
Stock and company information is readily available to the public. Company earnings, financial ratios, and leadership teams can be researched and studied, either directly or through research analyst reports, before committing capital. Stock traders who make hundreds of trades per day can use the day's activities to make future decisions.
On the other hand, if you sit down at a blackjack table in Las Vegas, you don't have any information about what happened an hour, a day, or a week ago at that particular table. You can hear that the table is hot or cold, but this information is not quantifiable.