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At the heart of it, gambling is based upon chance. And all must lose for one to gain. But investing is based upon knowledge and all have the opportunity to win. Both involve risk, but only investing allows equal opportunity for all to benefit. I’ve often heard people say: “Investing is no different that gambling.” Au contraire. There is a big distinction between gambling and investing. Gambling looks like this: Buying stocks or bonds willy-nilly; Following a hot tip; Purchasing the hottest fund; Trying to time the market (buying when it’s high, freaking out and selling when. Investing Let’s take Preston’s questions one at a time. First, he asks, “If you invest the $50 a week into a stock fund instead, aren’t you somewhat subscribing to unknown to risk in the same way that you are with educated (not random) sports gambling?”.

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Right before the 2010 Super Bowl, a page 1 article in the February 5, 2010 Wall Street Journal opened with this sentence:

“Investors are sometimes accused of treating the stock market like a casino. Now, one Wall Street firm wants to treat casinos like the stock market.”

The article details the decision of a Wall Street bond-trading company to take over the management of sports betting at a new Las Vegas casino. Lee Amaitis, the company executive who runs the betting operation, says the firm got into sports gambling because “we wanted to turn gamblers into traders.” Using sophisticated financial-markets software, bettors can not only bet on the final outcome, but also make wagers on events during the game, such as whether the next pass might be completed, or who kicks next field goal.

On several occasions, the article noted similarities between investing and gambling. The article even featured a bond trader-turned-professional gambler who said “Wall Street is just a form of legalized gambling.”

Is investing just a form of gambling? For many investors, the answer may be “yes.” But it doesn’t have to be. And it probably shouldn’t be.

In July 2000, Tom Murkco, the CEO of Investor-Guide.com, published an essay titled “What is the difference between gambling and investing?” While Murkco noted that many aspects of gambling and investing might appear similar, there were several distinct and easily defined differences.

For either investing or gambling, the beginning of Murkco’s definition is the same: An activity in which money is put at risk for the purpose of making a profit.

But while the purpose of gambling and investing is identical, the methods by which the purposes are achieved are drastically different.
Here are Murkco’s distinctions:

When someone invests…

• sufficient research has been conducted;
• the odds are favorable;
• the behavior is risk-averse;
• a systematic approach is being taken;
• emotions such as greed and fear play no role;
• the activity is ongoing and done as part of a
• long-term plan;
• the activity is not motivated solely by entertainment or compulsion;
• ownership of something tangible is involved;
• a net positive economic effect results.”

When someone gambles…

• little or no research has been conducted;
• the odds are unfavorable;
• the behavior is risk-seeking;
• an unsystematic approach is being taken;
• emotions such as greed and fear play a role;
• the activity is a discrete event or series of discrete events not done as part of a long-term plan;
• the activity is significantly motivated by entertainment or compulsion;
• ownership of something tangible is not involved;
• no net economic effect results.

When defined this way, it’s easy to see the differences between investing and gambling. It’s also easy to see that because of the methods some people use to invest, their behavior may more closely resemble gambling.

For example, industry studies have repeatedly shown that the behavior of mutual fund investors often accounts for poor investment performance. Because they don’t approach investing systematically, emotions like greed and fear may cause people to make impulsive decisions, with little or no research. Not surprisingly, the results from these methods more often resemble the returns from lottery tickets.

Gambling Vs Investing

Not Gambling with Your Investments: Easier said than done?
In his book, Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes With Your Money,author David Adler says it’s the psychological component of investing that is the most difficult to manage. Adler contends that behavioral research shows many individuals have an almost over-whelming set of hard-wired dispositions to take gambles rather than make investments. Adler quotes Andrew Lo, an MIT professor of finance:

“The same neural circuitry that responds to cocaine, food, and sex has been shown to be activated by monetary gain as well.”

For some people, the thrill of investing/gambling can be addictive. But when the stakes are one’s financial future or retirement, or your children’s college education, the need for a thrill shouldn’t come by jeopardizing one’s investments.

This imperative to not compromise investing by gambling highlights one of the greatest benefits of working with a team of financial professionals: Besides receiving informed advice, a financial professional can often serve as a protection against gambling with your investments, by encouraging you to make sound decisions based on good research that have a high likelihood of success.

Take a moment to consider the last few major financial decisions you’ve made in the past year. Then look at the list above. Did you make an investment or take a gamble?

Is the stock market gambling? Should people consider trading in the stock market to be a form of gambling? The answers to these questions are an unequivocal – No! Investing in the stock market is not gambling, and novice investors should not think of it in that way.

Equating the stock market to gambling is a myth that people on the internet and television pundits have perpetuated for years. And, it’s simply not true.

While investing and gambling have a few similar characteristics, they are very much different. And, if an investor does not take trading stocks or buying shares of mutual funds seriously and equates it to gambling, they are in serious jeopardy of losing money or missing out on gains from the stock market that they need for retirement.

Why Stock Trading Is Not Gambling

Stock Is Ownership

Investors must remember that they are purchasing ownership in a company when they buy shares of common stock. Investors own a very small portion of the company. That’s why I love buying cans of Dr. Pepper. It feels like more money is ultimately going back into my pocket with every sip.

Buying shares of a company is equivalent to having a claim on the assets, debts, and more importantly a small fraction of the profits of the company whose shares you buy. Far too often, investors look at buying shares of a company simply as trading stocks. They forget that they are now owners of the company too.

To gain an advantage and earn a profit on your stock trading, investors must try to gauge the company and its profitability. Incorrectly gauging profitability in the short and, more importantly, over the long term is why stock prices fluctuate on the stock exchanges.

The profit outlook for business is always changing, and investors are using stock charts, news, rumors, company metrics, and fundamental analysis to estimate the future earnings of a company and subsequently the value of its stock in the future.

The Value of a Company

Trying to determine the value of a company’s stock price and where it’s going in the future isn’t easy. There are a lot of different variables that move the short-term price of a company’s stock. They often appear to be random, but they’re not really.

Over the long term, a company’s stock is the present value of all profits that the company will make. In the short term, a company’s share price is a lot more volatile. A company can trade shares even without profits because investors think that the company will have future earnings. But, eventually, a company’s stock price will show the true value of the company.

Similarities in Investing and Gambling Strategies

Studying Behavior

Investors and gamblers study odds and look for an edge to enhance their performance. With gambling, especially games like blackjack and poker, players study behavior. They look at the mannerisms and patterns of their opponents. This helps them gain useful information to influence their betting and strategy.

Investors study trading patterns through stock charts to predict a stock’s price the in the future. Investors have a distinct advantage with gaining information. Company information is readily available on the internet and through company filings with the Security and Exchange Commission (SEC). Investors can find a wealth of information in the SEC’s Edgar database on company stock filings.

In the Edgar database and company filings, you can find out the types of assets that companies hold and if they are a holding company that other firms underneath its umbrella. For example, 888casino.com is a well-known online casino brand of 888holdingsplc.com. It has many other brands such as 888.com, 777.com, 888poker.com, 888sport.com etc. And, 888holdings Plc actually has shares of stock that trade on the London stock exchange. (symbol 888). So, imagine you invest in the 888holdings share and also play online at their 888casino, that will make you an investor and a gambler at the same time.

Risk

Both investing and gambling involve risk. You have to risk capital in order to gain value in both the stock market and a casino. It is the risk that investors and gamblers take on that gives them the right to earn more than they wagered.

Both investors and gamblers must know how much risk they can tolerate, though. Every investor and gambler has a certain risk tolerance that they are willing to lose. You must know your risk tolerance before you start investing or gambling. Not knowing when to stop or sell will make you vulnerable to potentially losing more than you intended.

Differences in Investing Strategies and Gambling

Zero Sum Game

Unlike investing where there are moderate winners and even some losers over the long and short term, gambling is a zero-sum game. There has to be a winner and a loser with gambling. Gambling takes money from a loser and gives the same money over to a winner every time.

In investing, there can be varying degrees of winners and losers. There can be total losers or total winners, but because investors buy and sell instead of waiting for a gambling hand to be completely over, they can have partial winners and partial losers.

But, with gambling, no value is ever created. The value or money wagered is simply transferred from one gambler to another. Investing increases the overall wealth of the economy. With investing, companies increase their productivity and develop new products that improve people’s lives. Companies create profits and share those profits through dividends to investors. Investing creates wealth over the very long-term for investors and is not the same as gambling’s zero-sum game.

Limits to Investing Losses

Investors can often limit their losses and get out of a trade if they start to lose money. Stock investors can establish a trading order called a stop loss with their broker or online brokerage firm to limit their losses. I often immediately place a stop loss order after purchasing shares 10% lower than my purchase price on the off chance that the company is hit by a selling frenzy before I can get in to sell my shares.

Sometimes, I’ll place a similar limit order when I’m swing trading to sell shares at my target upside price as well to lock in my target profit margin. Many times I’m looking for a 10% raise in a stock when I’m swing trading, and I routinely place limit orders as soon as I buy a stock.

With a stop loss order placed, I will only lose 10% if a stock drops in value below what I purchased it for. This helps me sell the stock to someone else and retain 90% of my capital, limited my downside risk.

Time Horizons for Trading and Gambling

Gambling Vs Investing Websites

Time horizons are another difference between investing and gambling. They are different than gambling even if you’re day trading, swing trading, or simply buying and holding your investments. Most gambling is a time-based event that has a set end time or date where you find out whether you’ve won or lost your bet. Investing can continue indefinitely in some cases.

Many companies pay dividends to investors and reward them for purchased shares for years. You can lose money on paper as your investment value declines, but dividend paying stocks will continue to pay you typically each quarter to wait for a rebound. With gambling, you either have to win or lose the money that you bet. There is no middle ground.

Limited Information

Unlike investing, there is only a limited amount of information while you are gambling. You may be able to pick up a few signals from the table or hear a few grumbles from your fellow blackjack players at a casino on whether or not the table is hot or cold. But, that’s about all of the information that you’ll get.

Investing is completely different. There is a plethora of information about the companies you invest in through online forums, stock analysts’ reports, conference calls, company filings, and the like. While gamblers are almost blind to any inside information that can help them get an edge on their competition.

Gambling Vs Investing Advice

Gambling and investing have a lot of similarities. But, they are also very different. Investing in the stock market is not gambling.

Gambling Vs Investing For Dummies

Equating the stock market to gambling is a myth that is simply not true. Both involve risk and each looks to maximize profit, but investing is not gambling. And, gambling is not investing. Each plays a unique role in our society, but investors should not confuse where the similarities end and make each one unique from the other.

What do you think? Is the stock market gambling? Do you consider trading in the stock market to be a form of gambling? Why? I’d love to hear your thoughts in the comment section below.