Differentiating Gambling from Investing
It is very true that both gambling and investing involve choice and risk, specifically both activities involve the risk of a certain amount of capital with the future anticipation of a return of profit. But gambling over the long run yields a negative expectation of return while investing in the long run yields a positive expectation of return. Plus, the activity of gambling is perceived as being short term while investing possibly can last a lifetime.
In both gambling and investing the common key concept of each is the minimization of risk to afford the maximization of return. But it is here that the similarities diverge. Let's investigate each of these activities in depth then conclude with a discussion of the major differences between the two.
To invest is to allocate money with the expectation of a positive benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time. When a person invests, it always requires a sacrifice of some present asset that they own, such as time, money, or effort.
[Wikipedia. Investment. (Accessed October 20, 2021].
There is a direct correlation between risk and reward in investing. Typically, a lower risk investment yields a lower return while a higher risk investment yields a higher return. One of the first decisions an investor must face is the amount of money they are willing to subject to the risk. These risk/reward decisions can vary widely even within the same class of assets. For example, in the equities markets, a NYSE blue-chip stock will have a different risk/reward profile from a Pink Sheet penny stock.
As such, with investing, investors employ different risk management strategies. By investing their capital in different assets or dissimilar types of assets in the same asset class, investors are taking steps to help themselves minimize any potential loss.
Furthermore, certain investors take the time to study performance charts to discern trading patterns hoping to be able to predict future price movements in the subject asset. By using this technical analysis, the investor is attempting to leverage the charts to gain perspective on price direction to maximize gain.
Gambling (also known as betting) is the wagering 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....
[Wikipedia. Gambling. (Accessed October 20, 2021).
Simplistically, gambling is staking an asset on some sort of contingency. Gambling is more completely dependent upon the element of chance.
In the same fashion as investors, gamblers must make a determination of just how much they wish to stake. The professional gambler is very adept at risk management. They utilize such tools as 'pot odds' in cards, research into the team's history they are intending to 'bet' on, or even a horse's bloodlines and racing statistics in horseracing.
There is a major difference between 'casino' gambling and 'sports' gambling. In 'casino' gambling, the gamblers are playing against the establishment in which they are playing (the 'house'). However, in 'sports' gambling, the gamblers are in essence playing against each other as the total number of players and the amount they bet determine the odds of the gamble.
Nonetheless, in either case, the odds are typically running against the gambler. In this regard, the gambler's probability of losing the stake is typically greater than winning an amount in excess of the stake (profit). Additionally, any chance of receiving a profit is reduced if gamblers are required to pay 'points' (An amount in addition to their wager that is kept by the establishment regardless of win or loss). These 'points' are akin to transaction fees paid by an investor.
WHAT ARE THE DIFFERENCES BETWEEN GAMBLING AND INVESTING?
While there are some similarities between gambling and investing the two are inherently dissimilar. Both share the basic principles of minimizing risk and maximizing reward. In gambling though, the house has a mathematical advantage over the player, which advantage increases in the house's favor the more a player continues to play. But in investing, as markets are consistently appreciating over time, the investor holding an investment asset will typically tip the odds and realize a positive return.
In gambling, the strategy is to make fast money. In other words, gamblers bet in excess and in undisciplined fashion on the hope that chance will yield them a big return. Once the subject race, hand, or sporting event is complete, any opportunity to profit from the activity has ceased. Whereas proper investment strategy involves a disciplined approach that occurs over a period of time. By approaching investments in a slow and steady path, the investor is more likely to realize a consistently positive return year after year.
An important distinction between gambling and investing involves the mitigation of losses. For the most part, gambling boils down to a win or lose proposition. Loss mitigation in gambling is virtually nonexistent. However with respect to investing, there exists many loss mitigation mechanisms available for the savvy investor. For example, when trading equities, placing a 'stop loss' on the investment is a vehicle to mitigate loss at an acceptable level thereby avoiding further undue risk of holding.
In both gambling and investing, information is a valuable material. By studying historical performances as well as past and current behaviors, both gamblers and investors are seeking an edge to improve their present returns. However, the quality and availability of the information available differs greatly.
In investing, there is a plethora of public information available concerning the underlying asset or company involved. So direct and quantifiable information is available to the investor prior to any outlay of capital. The same does not hold true for gambling. In gambling, for example, let's assume you are in the casino at the Golden Nugget in Atlantic City and you want to play blackjack. You approach a table and have no way of knowing what occurred at that table in the past. At best, you may have overheard other gamblers saying that the table was running 'hot' or 'cold', but in no way is that quantifiable information sufficient to aid your decision to sit and play before laying out cash.
One final important distinction between gambling and investing involves the payment of taxes. In gambling, the gambler is required to pay tax on any winnings exceeding $600. But in investing, retirement accounts are available to investors that permit them to defer paying taxes on their investment earnings.
For the reasons set forth above, if you are looking to increase your wealth, investing is the preferred path to take over gambling. While striking it rich with that lottery ticket is enticing, the odds are after the draw you will be ripping up your ticket. A slow and steady disciplined investment strategy exhibits better odds in favor of yielding a positive return.
With whatever path you choose to pursue, the best of luck to you.
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