For many people, the risk involved in investing can make the whole process feel a bit like gambling. But, truthfully, there is quite a big difference between the two. And that’s exactly why I decided to write this article. In fact, before we get much further, allow me to answer the very important question, is investing gambling?
No, investing is not gambling. While both involve risk, when you invest your money, you receive ownership of something in return. Gambling, on the other hand, is a wager between two parties that depends on a particular outcome and results in a gain for one, and a total loss for the other.
So essentially, the biggest difference between investing and gambling, is that when you invest your money, you are purchasing something of value. Whereas, when you gamble, you only receive some sort of value if you bet on the right outcome.
But that isn’t the only difference.
That’s why, for the rest of this article, I’m going to take a deeper dive into the top 5 reasons why investing is different than gambling.
Let’s get started!
1. Investments Have Value
As I mentioned at the beginning of this article, whenever you purchase an investment, you receive some kind of ownership in return. For example, when you decide to invest in real estate, you receive ownership of the property you purchase. When you purchase stocks or mutual funds, you receive a portion of ownership in one, or multiple publicly-traded companies. Even when you invest in precious metals (i.e. gold, platinum or silver), which tend to carry a higher-level of risk than many other investments, you receive ownership of the precious metal.
And here’s the thing, in nearly every case, if you invest in something, even if that investment decreases in value, you can still sell it.
That just isn’t the case with gambling.
I mean, if you bet $100 on a particular horse to win the Kentucky Derby, and it doesn’t, you just lost all that money. It’s all or nothing.
Talk about a big difference between investing and gambling.
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2. Proper Investing Puts The Odds In Your Favor
I don’t think it’s any secret, but when you gamble, especially at a casino, the odds are not in your favor. Unless, of course, you are a casino owner.
You see, the odds in gambling are set to benefit “the house” in the long run. So, mathematically speaking, the longer you gamble the more money you are going to lose.
Meanwhile, as an investor, when you put your money into well-researched, strong investments, the odds of earning a return are in your favor.
For instance, at the time of writing this article, over the last 10 years, the S&P 500 has earned an average annual return of approximately 10% (source). As an investor, I can look at that number and know that it is probably a strong place for me to put my money.
When it comes to gambling, however, those kinds of odds don’t exist over the long-term. Sure, you might win a quick buck here and there, but in the long run, the house always wins.
This is also why people that invest consistently usually end up wealthy, and people that gamble consistently typically end up broke.
3. Compound Interest
As an investor, it is easy to take advantage of the power of compound interest. All you have to do is re-invest your earnings into the same investments that are producing gains, and your money will grow faster and faster. It’s a truly awesome thing to experience.
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.
4. You Can Diversify Your Investments
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.
That way, if one of your investments goes down, and another one goes up, you don’t experience as great of a loss. 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.
5. Humans Play An Important Role In The Outcome Of Investments
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.
Truthfully, this isn’t something many people consider when it comes to investing, but it is a critical distinction between investing and gambling. And when you take this critical component into consideration, at least in my experience, investing becomes a much less terrifying venture.
Investing and gambling are two very different things. Let’s review:
- With a wise investment strategy, the odds of success are in your favor. Meanwhile, gambling puts the odds against you.
- When you invest in something, you receive ownership in return for your money. Gambling is a high-risk wager, based heavily on chance.
- As an investor, you have the opportunity to earn compound interest. As a gambler, not so much.
- You can diversify your investments in order to lower your risk of losing money. Meanwhile, all forms of gambling come with a high risk of loss.
- Humans play an important role, and can influence the outcome of many investments. Gambling is based on chance.
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.
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