Most people, especially none investors and even investors believe that investing is gambling. That is why there are always highs and lows in the stock market, because majority of stock investors believe in throwing a dice, picking a stock based on intuition and hoping that it goes up. Now to be honest with you, there are a lot of gamblers in the stock market posing as investors or traders.
However, I will be doing my best to draw a line between these two terms. Even though both involve risking your capital with the hopes of future profit, stock investing and gambling have major differences that set them wide apart. So, if you have been in support of the common myth that investing in the stock market is in no way different from gambling at the casino, this post will help clear that off your mind.
Now what is the difference between stock investing and gambling? How is a gambler different from a stock trader since both risk capital based on speculation? Below are 10 major factors that distinguish stock investing from gambling:
Top 10 Differences between Stock Investing and Gambling
1. Risk management tactics differ
Both stock investing and gambling involve the simple principle of minimizing risk while maximizing profits. But how this principle adopted varies in both practices. While stock investors consider diversification across different investments as the strategy for minimizing potential losses, gamblers look into the risk capital to risk reward ratio and would only put in their money if the odds are favorable.
2. Gambling is time-bound
The concept of time is another key difference between stock investing and gambling. Gambling is a time-bound practice, but stock investing can last several years. In gambling, once the game or hand is over, your chances to make more profit from your wager are closed. But in stock investing, you have good chances of making more profit as the years roll by. Returns from dividends are a key component to making money in stocks over a long period.
3. In stock investing, you can limit your losses
Stock investors can prevent total loss of their risked capital if the market starts to turn sour and there are no hopes of a positive turnaround. Investors have certain options to help them prevent undue risk this way. For instance, if your stock drops by a certain percentage of your risk capital, you can stop your investment and sell that stock to someone else.
This way, you would still hold on to 90% of your risk capital. But in gambling, you cannot set stop losses on your bet. If you bet that a team will win a soccer match and that team loses, you cannot get any part of your money back. So, gambling prevents people from minimizing their loss.
4. Indicators are different
Both stock investors and gamblers adopt various strategies in order to boost their chances of winning. One of such strategies is careful analysis prior to risking their money. In stock investing, you analyze trading patterns by interpreting stock charts. This will help you predict what will likely happen in the market in the future. It is known as technical analysis.
You can also choose to research the company you want to invest in. This is known as fundamental investing. In gambling however, you analyze the mannerisms and betting patterns of your opponents. This information may be all you need to make a well-informed decision and predict the likely outcome of a bet.
5. In stock investing, helpful information is readily available
Of course, information is very necessary in both stock investing and gambling. But while information about companies (such as earnings, financial ratios, etc.) and their stocks are readily available for public use, gamblers have no way of getting information about what happened in the recent past. And where they have such information, it’s usually not quantifiable.
6. In gambling, you are safe until you place a bet
If you enter a casino and buy in, you won’t be taking any risks with your money until you decide to place a bet. And if you don’t place a bet, you can easily withdraw the exact amount you bought in; no profits, no losses. But in stock investing, your money starts working right from the moment you put it in. So, you will hardly get back the exact amount you invested; even if you decide to withdraw your funds. It’s either you make some profit or some loss.
7. Stock investing makes you an entrepreneur
If you have invested funds in stocks in different companies, you can confidently claim to be an entrepreneur (an investor). Even if you have no other business to run, your funds will keep working for you. But gamblers are never regarded conventionally as entrepreneurs (and they don’t see themselves as such). In fact, in some places, gambling is looked at with contempt.
8. Stock investing has economic benefits
When you invest in a company’s stocks, you are simply helping that company grow by making your funds available for that company to do business with. But in gambling, there are no economic benefits, as you are not investing in any company.
9. In stock investing, more is usually better
The more you gamble, the more likely you are to lose more money because gambling gives you no chance to stop loses, and you don’t have the chance to revive your money once the odds are against you. But in stock investing, the more you trade with various companies, the better your chances of making profits. This is because stock investing allows you to stop your losses. Most of the time, you’ll make money in the long term.
10. Gambling is pure chance or luck
Although some gamblers claim to be skilled at analyzing the likely outcome of a placed bet, this is usually an empty claim. You can never have a “professional” gambler who doesn’t lose money. But you can have a seasoned stock investor.
In other words, with the right research, you are very unlikely to lose in stock investing. But in gambling, experience is rarely is helping factor. So, while gambling is just playing by hazard, trading stocks is about understanding market trends and cycles and taking advantage of them.