If You Think Gambling and Investing are the Same, Think Again
You’ve probably heard someone say, “Investing in the stock market is just like gambling at a casino”. It’s true that investing and gambling both involve risk and choice. But gambling is typically a short-lived activity, while investing can last a lifetime. Also, gamblers can expect a negative return, on average and over the long run. On the other hand, investing in the stock market typically carries with it a positive expected return on average and over the long run.
The lack of understanding behind the difference between gambling and investing is concerning. The BC Securities Commission’s (BCSC) research shows many British Columbians feel that no matter how much homework you do, every investment is a gamble.
This article identifies the difference between gambling and investing.
What is Investing?
Investing is a way people try to earn more than the interest a savings account provides by purchasing stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investments. There’s a degree of risk with any investment, but history shows that a disciplined, long-term investment strategy can grow a person’s savings, increasing their wealth over time.
Investors often choose an investment strategy, along with a plan that helps diversify their investment portfolio. Diversification is a way to spread your money across different assets, or different types of assets within the same class, to help minimize potential losses.
Fees are also a part of investing. You pay fees and other charges to your advisor’s firm (if you choose to use one) for managing your account and making transactions, as well as compensation paid to the firm by other companies relating to an investment that you may purchase. Investment returns can be affected by the amount of commission an investor must pay a broker to buy or sell stocks on their behalf. Even if you use self-directed investing, there are trading fees that can eat into your returns. So it’s important to review your account statements and understand the fees you pay for the investments you hold.
When you gamble, you own nothing, but when you invest in a stock, you own a share of the underlying company. In fact, some companies actually reimburse you for your ownership in the form of stock dividends.
What is Gambling?
Gambling is defined as staking something on a probability. Also known as betting or wagering, it means risking money on an event that has an uncertain outcome and heavily involves chance.
Like investors, gamblers should carefully weigh the amount of money they want to put “in play”. Many professional gamblers take steps to manage their risk; if they’re waging a bet on horses or sports, they will research athlete or team history, or a horse’s bloodlines and track record.
In casino gambling, the bettor is playing against “the house”. In sports gambling and in lotteries – two of the most common gambling activities – bettors are, in a sense, betting against each other because the number of players helps determine the odds. In horse racing, for example, placing a bet is actually a wager against other bettors: the odds on each horse are determined by the amount of money bet on that horse, and can change dramatically until the race begins.
Generally, the odds are stacked against gamblers. The probability of losing is usually higher than the probability of winning. A gambler’s chances of making a profit can also be reduced if they put up money beyond their bet, referred to as “points”, which is kept by the house whether the bettor wins or loses. Points are comparable to the broker commission or trading fee paid by an investor.
Key Differences Between Gambling and Investing
Let’s talk about four key differences between gambling and investing.
1. The Risk Factor
Risk is the degree to which you’re willing to lose some or all of the money you have invested. Investors take risks to earn dividends, interest, or capital gains to increase the value of their investments over time.
In both gambling and investing, a key principle is to minimize risk while maximizing profits. But when it comes to gambling, the house always has an edge – a mathematical advantage over the player that increases the longer they play.
In contrast, the stock market grows over the long term. This doesn’t mean gamblers will never hit a jackpot, and it doesn’t mean investors will always enjoy a positive return. However, over time, if you keep investing or gambling, the odds will be in your favour as an investor and not in your favour as a gambler.
2. The Loss Factor
Another key difference between investing and gambling is the ways in which you can limit your losses.
Investors have a variety of options to prevent total loss. One way to help reduce the risk of your investment portfolio is through diversification. Diversification doesn’t necessarily make you more money or stop you from losing money; it means not putting all of your eggs in one basket.
For example, if you hold one investment and it performs badly, you could lose all your money. If you hold a diversified portfolio with a variety of investments, it’s less likely that all of your investments will perform in the same way.
Setting stop-loss orders on your stock investment is one way to avoid undue risk. A stop-loss order is an order placed with a broker to buy or sell a specific stock once the stock reaches a certain price. A stop-loss is designed to limit an investor’s loss on a stock. For example, setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%, thereby allowing you to still retain 90% of your capital. However, if you bet $100 on a team you think will win the Super Bowl, you can’t get part of your money back if they just make it to the Super Bowl. And even if they did win the Super Bowl, don’t forget about that point spread: if the team doesn’t win by more points than given by the bettor, the bet is a loss.
3. The Time Factor
The concept of time also differs between gambling and investing. Gambling is a time-bound event, while an investment can last many years. With gambling, once the event is over, your opportunity to profit is gone. You either won or lost.
Investing in stocks, on the other hand, can be time-rewarding. Investors who purchase shares in companies that pay dividends are rewarded for their invested dollars. Dividends can be a key component to making money in stocks over a long term.
4. The Information Factor
Both investors and gamblers may look to the past, studying historical performance and current behaviour to improve their chances of making a winning move. Information is a valuable commodity in the world of gambling as well as investing, but there’s a difference in the availability of information.
Stock and company information is readily available for public use. Public company earnings, financial ratios, and management teams can, and should, be researched and studied before one commits money.
In contrast, if you sit down at a blackjack table in a casino, you have no information about what happened an hour, a day, or a week ago at that particular table. You may hear the table is either hot or cold, but that information is not quantifiable.
The Bottom Line
There are some similarities between investing and gambling: both offer a chance at profit, both can expose you to losses, and both carry elements of risk. However, gambling and investing are not the same – there are important differences.
With investing, you have the expectations of returns; with gambling, you can only hope for returns.
Making a blind investment without due diligence is like gambling. If you’re well informed, the investment has been researched, analyzed, and shows good risk/reward potential, it can be treated as a sound investment decision – not a gamble. Investing is only gambling if you treat it as such.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through email at [email protected]. You can also file a complaint or submit a tip using the BCSC’s online complaint form.