November 15, 2024 (Investorideas.com Newswire) How often do we read about how to "play" the markets as an investor? This suggests that investing can be considered as a kind of gambling and an exercise in trying to beat the odds of failure.
So, for some people, this has formed a definite link between the two activities, however it's something of a fallacy that the two are the same.
That's because, while there may be certain similarities, there are just as many key differences and it's important to be aware of these if you're planning to indulge in either.
So, let's start with a couple of definitions.
Investing and gambling defined
Investing is the act of using money to buy stocks, shares, bonds and other investment vehicles in the hope that over time they will increase in value. It's not guaranteed that they will do this, and they can even go down in value but there is potentially no upper limit to the returns that might be possible.
Gambling, on the other hand, is generally a short-term bet on whether a particular outcome or string of outcomes will occur. The returns for a successful bet are set by the odds for the desired outcome and will never rise above that figure.
In gambling, when it's gone it's gone
A key difference between gambling and investing is a question of assets. Say you have invested $10,000 in a particular fund with the aim of seeing a 5% annual return on your investment. However, market conditions aren't in your favour and the value of the fund drops by 50%. You still have $5,000 and there is the possibility that, over time, the fund will pick up and you could still end up making a profit.
With gambling it's clearer cut. If you win, you'll make a profit on that bet. If you lose that stake money is gone forever and if you want to try to recoup your loss, you'll have to do it by placing another bet and hoping for the best. There is, however, a lifeline.
That's because many top gambling sites will offer a welcome bonus in the form of free stake money which can be used before depositing your own funds.
Risk v return
Where gambling and investing do intersect is in the relationship between risk and return. So, the more unlikely the outcome will be, the more that you potentially stand to make if it does occur.
In investing terms this means putting money into more volatile markets or shares which have the capacity to rise dramatically but which also carry with them the danger of precipitous falls in value.
In gambling the risk is simply one that is governed by probability. So the lower the likelihood of an event occurring the more you stand to win if it does. To give an example, in roulette a successful bet on a single number will reward the player with 35 times their stake money whereas one on red or black or odds or evens will just double it.
Available information
Similarly, in casino games the only real information that a player has about the likelihood of a bet coming good is the odds of it occurring. That's because casino games are a series of random events that follow no pattern.
Investors, on the other hand, have a wealth of information on which to make decisions. It could be about the company that they want to invest in, the economy as a whole or even on previous movements in the markets.
In gambling terms sports betting does offer information about how specific teams have performed in the past as well as current form. Despite this, sports betting is just that - gambling, not investment.
A question of time
The key difference between investing and gambling has to come down to a question of time. Investing is something that is generally agreed to be a mid to long-term strategy. This is because even if the value of investments fall in the short term, over time the general trend is for appreciation.
With all forms of gambling there is never the opportunity to wait things out to see if they'll improve. As we've already stated, a lost bet's a lost bet and there are no second chances.
A similar mindset
Having gone through many of the differences between investing and gambling it's worth noting that, psychologically speaking, there are many similarities in the mindsets of investors and gamblers including a thrill at risk-taking.
However, one has to conclude that there are very many differences that outweigh this fact.
With so much clear water between investing and gambling, they can't be considered as the same kind of activity, something that is worth considering carefully before one indulges in either.
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