Investing looks like a sophisticated form of gambling. However, there are huge differences between these two types of risk-taking behavior. If you're doing it right, long-term investing and short-term gambles are a world apart.
Image source: Getty Images.
Gambling vs. investing: A quick primer
Here are some of the main similarities and differences between gambling and investing. I promise to keep it quick:
- Gamblers and investors put real money into someone else's performance. Both take on a certain amount of risk in hopes of a positive return.
- In gambling, you're usually looking for a big gain -- very quickly. The promise of game-changing returns on your bet inspires the gambler to accept higher risks and more uncertain outcomes.
- Classic investing is all about building a financial return over a long time. Even a small annual gain can have wealth-building effects if you repeat the small increase many times. The mathematical magic of compound returns means that next year's gains will build upon the returns of every year before it.
- Most importantly, gambling usually involves games of chance or unpredictable sporting events. Investors contribute money to support a business, cryptocurrency, or other valuable asset, expecting that asset to gain value over time.
The line between gambling and investing is blurred when you're looking at pretty safe bets (for example, "Will Florida see rain in August?") or risky business models (like, "Let's buy crypto with borrowed money!"). Even then, stocks represent actual ownership of the thing you're investing in, while gamblers stay on the sidelines, no matter how many poker chips and betting slips they are holding.
That's what makes the S&P 500 (^GSPC 0.18%) different from a roulette wheel with 500 slots. Investors benefit from the earnest business efforts of other people, while gamblers just put down their money and hope for the best. It's not the same thing at all.
