Gambling vs Investing the Stock Market

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19/01/2018

The news is full of investors who became billionaires thanks to carefully playing the stock market. Equally, there are plenty of enviable gambling success stories, whether about an amateur winning big at poker or someone getting lucky on the horses. There are certainly many similarities between gambling and the stock market. Both offer that holy grail of instant riches, but they both have similar pitfalls, too. Is there a better choice if you're looking to spend your money wisely? Which will give you a better return, and which option has less risk?

Definitions and Fundamentals

It's interesting to note how we define gambling and investing. The dictionary definitions are quite different, and in a way also quite misleading. Generally, gambling is defined as taking a risk with the hope of gaining an advantage when the outcome is uncertain. Investing, on the other hand tends to be described as using money or capital in order to gain a financial return. However, swap these broad descriptions around and they apply to each other equally as well. This is where the lines between investing and gambling start to blur. Isn't investing also a risk with an uncertain outcome?

It's important to understand the underlying forces at work in both systems. As we can see on a daily basis, markets are as unpredictable as the outcome of a game of roulette or blackjack. Just look at the 2008 financial crisis or the rise of cryptocurrencies. Of course, there may be tell tale signs that investors can use to stack the odds in their favour of their particular markets, but ultimately there are no guarantees whatsoever.

The Profitable Choice

Given the unpredictability of both systems, the next question anyone looking for a fast and sizeable return on an investment will ask is which system will be the safer bet. It could be argued that markets can be easier to predict to some degree, but is this really true? Global events, whether manmade or natural, can cause huge fluctuations of capital, making investors rich or broke in seconds.

The financial crash of 2008 is the most obvious example. Many investments were wiped out and while a few who suspected a crash could happen may have invested to come out unscathed (or even make huge profits), they did so by taking a huge risk (we could even say 'a bet'). If you're playing a game of blackjack, and your hand is at 17, do you risk another card or cut your losses? The same principle is at play – rely on your experience and intuition, and take a chance (or not). The payoff could be huge, but so could the loss.

When gambling and investment are boiled down, there is little to separate them. What's interesting, as investorguide.com points out, is how we perceive both these systems. Investing is thought of as good, gambling as bad. Ultimately, neither is much better than the other in terms of investment security. This does mean that both should be approached the same way: carefully, responsibly and realistically. While immersing yourself in stats and research can be fun, and possibly tip the odds a little too, in the end, only fleeting luck can deliver those mythical big returns. That goes for investors and gamblers alike.