Is Investing Gambling? What You Need to Know
According to one survey, 55% of respondents think investing is as risky as gambling.
But is investing really as risky as playing poker or spinning a roulette wheel? The answer is NO (if you’re doing it right). Read below as we debunk the investing vs. gambling myth and break down how long-term investing (not trading) can help you build wealth over time.
- Gambling is a zero-sum game. This means that there’s a winner and a loser.
- With investing, you’re putting your money toward something that has inherent value.
- Investing involves taking calculated risks (aka you decide to take the risk based on numerous factors).
- Long-term investing means that you’re considering multiple factors before investing such as the company’s revenue, net income, and more.
Investing is NOT Gambling.
Gambling involves playing games of chance for money or something else of value. It’s risky because you have no idea what the final outcome will be.
Investing is not gambling because of three primary reasons:
- Gambling is a zero-sum game. Investing is not.
- You’re taking calculated risks instead of unknown ones.
- Investing includes careful decision-making after reviewing multiple factors.
Let’s dive into each one of these reasons below.
Note: It’s important to understand what we mean by “investing.” We’re not talking about day trading. We’re talking about long-term investing.
Long-term investing means you buy, hold, and sell assets for a long period of time. Thanks to time, compound interest, and consistent contributions, your money earns more money for you.
Investing can become gambling if you’re constantly trading assets like stocks without investing goals or waiting for companies to make money over time. It can also happen if you jump from one hot investment to the next without any research.
1) Gambling is a zero-sum game.
Gambling is a zero-sum game. This means that there’s a winner and a loser. The amount won by some players equals the combined losses of the other players.
With gambling, you’re expecting unreasonable returns. Every game you play has a high statistical probability of you losing money.
Investing isn’t a bet. It’s your opportunity to get profits from a business. The money helps the economy.
With investing, you’re putting your money toward something that has inherent value. Normally, you’re investing in a literal piece of business through stocks. These businesses generate profit (unlike gambling where you are betting on a win-lose event).
Investing–when done right– is a long-term game. You can’t expect your money to skyrocket overnight. You need to hold your investments for at least five years. If you’re buying and selling assets like stocks every few months, you’re stock trading and falling into the definition of gambling.
2) You take calculated risks as an investor.
Risk is the probability of a loss and the amount of money you could lose. Like gambling, investing comes with risk. But this risk is calculated (aka you decide to take the risk based on numerous factors). You can also lower your risk.
Gambling is based on chance which makes it riskier. You can’t control the risks. The probability of losing is normally higher than the probability of winning. Say that you’re playing roulette. You can bet on any color or number.
The closer your guess to the actual number spun, the more money you’ll win. But because the odds of you winning are solely based on luck, you’re following a dangerous strategy. You could quickly go from having $$$ to $0 in the blink of an eye.
According to Warren Buffet, “Risk comes from not knowing what you’re doing.” With investing, you can research different investments to determine how risky they are and if they are worth investing in. This isn’t possible with gambling.
Some investments are riskier than others. For example, crypto assets, hedge funds, and penny stocks are considered high-risk investments. To lower your risk, implement two investment strategies:
- Asset allocation: Invest in different asset classes like stocks, bonds, and ETFs. When some assets perform well, others perform poorly. A good mix of assets helps you balance risk vs. reward.
- Diversify: Also, diversify your investments to lower your risk. Invest in different industries, companies, etc. For example, you wouldn’t want your entire portfolio to be made up of tech stocks. Diversifying your portfolio lowers your risk of losing a lot of money.
Use the risk vs. reward equation to make investment decisions. Investments will be “High risk, high reward,” “Medium risk, medium risk,” or “Low risk, low reward.”
Hint: Sign up for the Complete Investing Course (Stocks, ETFs, Index/Mutual Funds) on Udemy to learn how to invest as a beginner.
3) Investing involves careful decision-making.
With gambling, you don’t know the odds or how much risk you’re actually taking. Success or failure mostly depends on chance. Long-term investing means that you’re considering multiple factors before investing.
Here are a few ways to make careful investing decisions:
- Invest in what you know such as companies or industries.
- Understand each investment before investing. For example, with stocks, read about the companies that issued the stocks. Learn about their revenue, net income, calculate their Price-earnings ratio, etc.
- Choose investments that match your risk tolerance.
- Analyze a company’s fundamentals to lower your risk even more.
You can’t predict the future, but your research and calculations can help you make smart investment decisions to increase your money over time.
Try long-term investing to build wealth
It’s not sexy, exciting, or a get-rich quick scheme. But long-term investing can make you a millionaire over time.
Although past performance doesn’t guarantee future performance, investing for ten years would increase your chances of making a profit to 94.15%, according to global stock market data between January 1971 and December 202.
Instead of trying day trading or types of investing similar to gambling, invest for the long-term. The process is simple.
- Make money through your job and side hustles.
- Save at least 20% of your income.
- Invest your money in different assets and diversify.
- Buy and hold your investments for five years or more.
Contribute a set amount to your portfolio each month. Let compound interest and time do the rest. Use an investment calculator to see how long it will take for you to reach millionaire status – no poker or roulette tables required.
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