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last updated 15/05/2022

Investing vs. gambling (What’s The Difference)

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The long asked question is investing the same as gambling, will be broken down and thoroughly explained in this investing vs gambling article.

So, what are the differences? Lets get into it.

John Maynard Keynes, British economist and the father of modern macroeconomics, is known to have said:

“It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges.”

This quote from a respected economist gives one a pause – so, in effect, investing and gambling are both undesirable activities?

The definitions of the two terms also seem to put the two activities on a par.

Wikipedia gives the most complete definition of gambling, defining it as

“the wagering of something of value (“the stakes”) on an event with an uncertain outcome with the intent of winning something else of value. Gambling thus requires three elements to be present: consideration (an amount wagered), risk (chance), and a prize. The outcome of the wager is often immediate, such as a single roll of dice, a spin of a roulette wheel, or a horse crossing the finish line.”

Well, isn’t investment essentially the same?

You also wager something of value (funds or capital) on an uncertain event (the outcome of the stock market) with the intent to gain something of value (income or profit).

You can invest in the stock exchange, hoping that your investment will appreciate, or in real estate, hoping that you can sell it later at a profit.

Both activities involve risk with the hope of earning a gain. So what is the difference?

Investors and gamblers are not always all that different

The difference isn’t always cut and dry.

There are professional gamblers who make a study of their subject, like some playing the horses. They study the breed, the history, previous races, the weight carried, the odds, and more to decide which horse to bet on. It’s a serious venture aimed at minimizing risk.

On the other hand, some investors behave like gamblers, buying to get-rich-quick schemes, or those who don’t spread their investment risk, but build a portfolio exclusively on high-risk investments.

A straightforward, easy-to-understand differentiation between investors and gamblers

The willingness to accept risk is probably the main difference between these two characters. Would you rather have $100 or a 50 percent chance at $100? An investor would take the $100; the gambler would go for all or nothing.

Someone who expects to double their money almost immediately, is a gambler. An investor that puts all his savings in a volatile stock that could become worthless overnight, is not investing; he’s gambling.

Having said that, there are distinct differences between the two according to those in the know.

1. A different time frame

We have already alluded to this difference.

Gamblers want an immediate return on their wager. It’s a short-lived exercise: once the game or race or card game is over, the chance to profit from the wager is also over.

In this all-or-nothing gamble, one of two things has happened: you’ve won the gamble, or you’ve lost.

On the other hand, when you have made an investment, you have to wait before you get any return on your investment.

In fact, savvy investors know that some time has to go by for the investment to appreciate over time.

Investing is playing the long game.

All investment experts will tell you to stay in it for the long haul, not to climb out at the first signs of the market becoming jittery. At the very least, investments should be left untouched for five years, but longer is better.

If you look at market graphs, you’ll see that the longer you are in the market, the higher your returns from the investment.

2. Building financial independence

If the investment is in a publicly listed company, investors receive their reward for investing in the company via dividends, which are paid out at certain intervals, like monthly, quarterly, or annually.

Dividend pay-outs can become an alternative income stream in the form of monthly interest payments. You can also benefit from capital gains as in the case of equities.

These gains from investments can be received over time, creating an alternative income stream and contributing to your financial independence.

On the other hand, payments to gamblers come in one lump sum, which, more often than not, is not a win and is not used to build wealth.

Most gamblers simply gamble their gains away.

3. Investing has some inherent benefits

Investment activities benefit a range of stakeholders: companies, investors, and the wider economy.

Yields from investments stimulate the economy, and boost company growth and production.

And, it is the key to financial independence for individuals. With the right investment strategies that grows wealth, people can retire with enough money to enjoy their retirement and not struggle financially at a time when they are no longer able to earn an income.

Do you see gambling profits providing a financially secure retirement?

Actually, in some cases, people who receive a sudden big payout from some gambling activity don’t build financial independence but waste the money in a few short years. 

4. Gambling has serious disadvantages

Constantly losing money can become a serious issue, with entire families not able to pay basic monthly expenses.

Gambling addiction can take over a person’s life, leading to significant financial losses. It can become a self-perpetuating endeavor, as gamblers keep going back, placing more bets in the hope that they can make up for previous losses.

People who become addicted to gambling can go to extreme lengths to lay their hands on money to keep gambling. Some even go so far as to take out large loans to continue their habit.

Gambling can seriously affect interpersonal relationships, destroying livelihoods, and lives. It’s interesting to note that there are support groups for recovering gamblers but not recovering investors.

Also, gambling is forbidden in many countries for the protection of the population, but investing is not prohibited anywhere.

5. The odds differ

Gambling makes no sense since the odds are always against you. Whether the bets are placed online or in a physical venue, the house always wins.

Generally, the odds are stacked against gamblers: losing a bet far outweighs the chances of winning, especially over the long run.

If you look at your results over time, you’ll see that in spite of some big wins, you come out even or below even, but you’re never the winner.

The house has a mathematical advantage over those the place bets, called the house edge. This is constructed in such a way that the house always wins in the end.

Betters are in effect playing against the house and the house always wins in the long run. In fact, the longer you sit at the table, the smaller your chances become and the more favorable they become for the house.

In the case of sports gambling and lotteries, you are not betting against the house; you are betting against other betting participants because the number of players is limited and helps to determine the odds.

Whenever you play the horses, you are actually betting against the other punters: The amount of money punters bet on a horse determines its odds and that keeps changing until the bell goes.

Where the odds are definitely stacked against gamblers, investors stand a better chance of making a profit on their investment.

The stock market tends to appreciate over the long term, so, if an investor is patient, the chances of a positive return is excellent. The stock market can crash, but if investors hang in there, their investments normally recover when the market recovers.

6. Limiting loss

In gambling, there is no way for you to limit your potential losses.

Once you’ve put the bet, if the horse loses or dice falls on the wrong color, that’s it – your money is gone.

Investors, on the other hand, can take steps to avoid all the money they have invested.

They have the option to set stop losses on their stock investments, so if the stock falls a certain percentage below its purchase price, they can sell that stock.

7. Gambling poses a mental health risk

Of course, this is not a risk for everyone placing a bet now and then.

When a person who already feels down loses money on a regular bases, it can cause them to become depressed, which can affect their general well-being. 

According to research, people who have a gambling problem are twice as likely to be depressed and 18 times more likely to experience severe psychological distress compared to people who don’t have a gambling problem.

There is a two-way interaction between gambling and mood: someone may feel depressed as a result of gambling losses.

Others may resort to gambling to find relief from feeling depressed for other reasons. For some people, going to the casino or the races gives them a sense of connection with others, which they crave, but can’t express and don’t know how to handle.

8. The stock market is backed by assets; casinos and betting venues are not

One of the reasons investments will always yield positive results is the fact that stocks are not worthless: they actually represent something of value, namely companies that are owned by owners and board members who are invested in their financial success.

The markets are likely to rise over time because their companies are productive and produce something useful to society.

Thanks to technological advances, productivity is rising, which contributes to increased revenue and company value. Other factors also play a role, but in the long run, the stock market appreciates and so do the value of investments.

Other factors also play a role, but in the long run, the stock market appreciates, and so does the value of investments.

There is no such backbone of value in gambling. The venue, the sports clubs, and the horses all belong to other people; gamblers don’t get a stake in that.

9. Investors can improve their odds, gamblers can’t

Whether you are out at the horses or sitting in the casino, you are handed the odds, and you can’t argue with that. You can’t say you want better odds.

Investors, on the other hand, can take steps to improve their odds, like not putting all their eggs in one basket. In investing, it’s called diversifying your portfolio.

By diversifying their portfolio, investing for an extended time, and making sure they don’t pay unduly high investment fees, and adhering to appropriate risk levels, investors can improve the odds of their investment efforts baring fruitful results for them.

10. Which one is a zero-sum game?

A zero-sum game is one where one person’s gain is another person’s loss, so there is no real change in overall wealth. A positive-sum game is one where all everyone can gain value.

A zero-sum game may involve only two players or many millions. Gambling is a zero-sum game, since one person’s gain is another’s loss, whereas investing is a positive-sum game where all participants can earn benefits.

Investing will always be a positive sum for investors provided the global market keeps rising over time.

However, in financial markets, there are two instances of zero-sum games, namely options and futures are examples. In these cases, every person who gains on a contract means there is someone who loses.

Gambling is out and out a zero-sum game. Betting creates no wealth; money is just redistributed. Investing, on the other hand, creates wealth.

Final thoughts

There are distinct differences between gambling and investing.

With gambling, you may strike it lucky and land a considerable sum in one go; with investing that’s planned carefully you can build wealth for yourself and your family.

With gambling, the longer you gamble, the more money you’ll lose; with investing, the more time that lapses, the greater the odds of positive returns.

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