How is investing different from gambling? That is the question we are going to dive into in this post. In short, the difference between investing and gambling is that investing, when done right, should have a positive outcome in the long run. Whereas gambling will have lower odds for a positive outcome the longer you play.
Let’s take a deeper dive into the topic of gambling, shall we.
How is gambling different from investing
What is the difference between gambling and investing? When gambling, you are playing in a casino, online or physical or with another provider. The game provider will have a “House edge”, where, for example, in roulette, even if you seem to have 50% odds of winning, they are more like 49%.
The difference between 50% and 49% might not seem that much. However, in the long run, that one percentage is the thing that makes casinos profitable. Having that house edge over players, the longer the player plays, the more likely the casino is to profit from that game.
Individual players might end up winning from casinos in the short term, but casinos are full of people. Even that one player won, doesn’t matter much to the casino. They have the odds in their favor on the long term. This same principle can be used when day-trading, more about that below in this post.
Why investing is supposed to be profitable
Now, let’s take a look at investing. Investing is supposed to be profitable because companies are supposed to make profits for their shareholders. Where in roulette your expected return on every spin is around 98% of the money you bet, in investing, that should be over 100%.
This means that for every spin you take in a roulette game, if you bet 100 dollars, in the long term, each spin costs you around 2 dollars.
In investing, if we are expecting an average return what the markets have provided in the past, which is around 8%, for every 100 dollars you invest, you could be, mathematically expecting an 8-dollar return on top of your initial investment.
Even that you mathematically should have positive expectations of the return, past returns are not a guarantee of future returns. The markets have their ups and downs. Therefore, the longer you invest, the more likely you are to end up winning, according to past data.
The same applies to gambling. Since it has a negative expected return, the longer you play, the more likely you end up losing some or all of your money.
How to make investing less risky
Investing can be used as gambling as well, if you put all your money into a meme stock, I would consider that more like gambling than investing.
However, there are ways you can make your investing less risky and therefore make it less like gambling.
The first way to reduce the risks of your investing is to diversify. You could either buy a lot of different stocks or invest in already diversified index funds, for example. You could put a portion of your savings into cryptocurrencies or buy some real estate.
Second is time diversifying. People have differing opinions about this one. Some say you should put all your money into the markets right now; others say time diversifying is a good thing to do.
I am a firm believer in time diversification. It means that even if you happen to have a lot of money right now lying around, you don’t put all of them into the markets at once. You could invest a portion of it every month, for example.
Time diversification comes automatically if you invest a portion of your income monthly. This way, even if the market happens to have a bad season for the next six months, you will lower your average price. This reduces the risks of investing and makes it less like gambling.
Do not try to time the exact top or bottom of the market, have a plan that you follow. Invest a portion of your monthly income, if that feels right. Don’t miss a month because “stocks seem expensive”. Stick to your plan.
Also, diversify among different kinds of investments. Like I mentioned earlier, stocks are just one part of the investing game. There is real estate, cryptos, and commodities. I have posts about all of these on my site as well, if you are interested.
Is day trading gambling?
Day trading is more like gambling than long term investing. However, the thing why day trading is supposed to be profitable is that you can put yourself in the shoes of the casino and have the house edge.
By analyzing the charts and markets well, you can have yourself the house edge. You don’t have to win every trade you take. If you risk 1 dollar to make 1 dollar, having a strategy that is profitable 51% of the time will make you a profitable trader.
As a trader, you should look for strategies where you have that small edge. Losing is part of day trading. Therefore, you should keep your head cool, even when facing several losses in a row.
Casinos don’t shut their roulette tables down if a player wins 3 times in a row. They know that they will end up with a profit in the long run. The game and the odds are in their favor. If you can do a trading strategy that puts the odds in your favor, you are going in the right direction.
Keep in mind that day trading is a very stressful job. It is certainly not for everybody, and some estimates say that 95% of day traders lose money. If you are interested in day trading, other day trading related posts can be found here.
So, is investing like gambling? Investing can be used as gambling, if not done right. However, with the right investing strategy and enough diversification, investing is far from gambling.
Both, gambling and investing can cause you to lose some or even all of your money, but investing has higher chances of leaving you with a profit.
If you decide to start investing, make sure you minimize the risks and make it less like gambling.
Other investing-related posts can be found here.
This is not financial or investing advice. Always do your research before risking your hard-earned money. Past returns of the market are not a guarantee of future returns. Some estimates say that 95% of day traders lose money.