On the other hand, in order to do the same thing gambling, you would have to win money, and then win more money with the money you already won, and so on. And since the odds are not in your favor, this is an extremely unlikely scenario. And by unlikely, I mean nearly impossible. If you really want to improve your odds with investing, you have the option of diversifying your investments.
For example, you could invest in mutual funds, individual stocks, real estate, and much more. This is a great way to reduce the likelihood of losing money, and increase your ability to build wealth. This is not an option when it comes to gambling. Since every gamble carries a high risk of losing money, diversifying your bets would likely only make your odds worse.
The fifth, and my personal favorite, reason why investing and gambling are different, is that humans play a prominent role in the outcome of investments. For example, when you invest in a company on the stock market, you are putting your money behind executives, employees, and other investors that all have a vested interest in the company earning a profit.
And with all those people working hard to reduce costs, innovate, and grow the company, your likelihood of earning interest on your investment is very good. In other words, humans have the ability to influence the outcome of an investment, which is not the case with gambling. And when you take this critical component into consideration, at least in my experience, investing becomes a much less terrifying venture. So there you have it, the 5 key differences between investing and gambling. If you were a little unsure on the subject, I hope this provided you with some clarity.
And if you were on the fence about investing, I hope this provided you with a new and positive perspective. Our goal here at Be The Budget is to help you save more money, earn a better living, and make the most of your financial life. Your email address will not be published.
About The Author. About The Author Zach Buchenau is a self-proclaimed personal finance nerd. When he isn't writing about budgeting, getting out of debt, making extra money, and living a frugal life, you can find him building furniture, fly fishing, or developing websites. He is the co-founder of BeTheBudget, and Chipotle's most loyal customer.
At the same time, they may find it difficult to articulate exactly why they are different. They are both often considered in a similar context — in fact, when asked to describe their personal investment strategy, investors sometimes resort to using gambling terminology. But can investing really be compared to gambling? If not, is there a better analogy that could deepen our understanding of investing in general?
While investing and gambling do share one major feature in common, namely risk , the similarities pretty much end there:. So, the gambling analogy is deeply flawed as applied to the art of true investing, but fortunately there is a much better analogy to help us understand why investing works, and one which also reveals the source of positive expected returns in financial markets. This analogy comes from the familiar world of banking, and is simply the concept of borrowing and lending.
Imagine two companies that both want to raise capital for their expansion. In order to fund their expansions, they could each borrow from a bank, issue bonds or issue new corporate stock. In fact, Apple is considered such a low credit risk today that they can borrow at favorable terms on a par with many sovereign governments!
Why does it cost the small company so much more? In a word, risk — because the risk of the small company not meeting all of its obligations is much greater, which translates directly into their higher cost of capital. The difference in bond yields makes it obvious which company is perceived by the market as riskier.
But cost of capital applies to all forms of capital raising, including issuing new stock — meaning the small, unknown company would need to offer a higher expected return to potential share buyers as well. This is also why investing is more akin to lending than it is to gambling, and explains why expected returns are positive on all true investments. Furthermore, it even explains why certain companies have higher expected returns than other companies, due to differences in perceived risk.
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The commission-free trading platform in question has seen its number of users spike across the past seven years — from , in to 13 million in , the year of the pandemic, according to Statista. At the moment, more and more people are trading, and the potential reasons for this — to try and double your money, to strike it rich, for the thrill of the chase, the highs and the lows — do sound strikingly familiar…. For its part, Robinhood and other platforms capped or restricted trading of GameStop stocks for a couple of days during this time.
Its users were unhappy, to say the least, claiming it was a form of market manipulation to help out the hedge fund managers. Hedge fund managers may not like it, but trading and gambling do have plenty of things in common. And similarly, the risk level rises with the level of investment, just as it does at the games tables. The highs — when you make the right call that sees the value of your assets soar — can be followed by quickly losing it all and having to start rebuilding your portfolio from scratch.
Within the similarities is also a more concerning sub-section — the potential for addiction. The addictive issues surrounding gambling — the chance of making a large profit, the fast pace of games, combinations of highs and lows, taking risks to regain that good buzz from successes, can also be present in the trading of stocks and shares.
Whereas investing, and portfolios, can be a life-long pursuit. Some argue that this difference in timescale also helps differentiate trading and gambling even further — with the odds for gamblers increasingly in favor of the house, the more and longer that they bet. But for stocks and shares, the common perception is that your chance of making money increases over time and pays off.
Yet all this does, again, depend on the type of trader or gambler you are. Other arguments include that when investing, you actually own a share in a company, which provides value either way. Compared to gambling, which gives nothing tangible in return unless you win. These benefits or profits are actualized within a certain time frame and can be gained in capital appreciation, interest or dividends.
Most forms of investments however, involve a certain amount of risks and, therefore, it is important to back such investments with a certain amount of research prior to getting involved. What is the difference between gambling and investing? Whether it is gambling or investing, various individuals engage their money in different ways with the aim of increasing their assets.
Gambling and investing are two common means that people choose for this purpose. Investing is a serious activity that involves research and background knowledge. Coming from Engineering cum Human Resource Development background, has over 10 years experience in content developmet and management.
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True, investing and gambling both involve risk and choice—specifically, the risk of capital with hopes of future profit. But. Gambling is a result of emotions. Investing, on the other hand, is a well-researched process. Here are. One of the key differences between investing and gambling is diversification. Investing provides you with the opportunity to spread your risk across all.