Listen to the Podcast
Subscribe to the podcastiTunes Stitcher
Today I want to give you some insights between investing versus gambling.
Some people look at gambling the same thing as investing. Or they think that gambling is the same thing as stock trading. I want to compare these kinds of things for you.
If you have family members or friends that are saying that investing and stock trading is like gambling it's essential for you to read this.
I want to break these things apart so that way you understand the deeper meaning behind one or the other. Because the definitions are very similar, they overlap, and that's why they can be a little bit confusing.
Definitions That You Need to Know
Let's take a look at these definitions. If we take a look at these two definitions, let's see how they overlap and also how they are different.
You put your money to use by purchasing or through expenditures in something offering a profitable return through interest or income.
You're playing a game of chance for stakes. It's either to risk money or anything of value. In other words, bet or wager.
In theory, there's quite a lot that overlap especially when you start looking for anything of profit in a game of chance.
Investing VS Gambling - How Things Work?
For example, I'm looking to invest in real estate buying a house. And I'm looking to rent out these houses and properties. For some people, this is a game of chance. The thing is that you're investing in real estate.
It's a chance because what if the house burns down. Anything can happen. I'm risking money or something of value to potentially profit sometime in the future.
In other words, collect interest or income. But it's also part chance. It's interesting that it overlaps because many people wouldn't say that real estate investing is gambling.
That is because they usually understand that a little bit more whereas other people may look at it more as gambling. That's the case especially if they don't know what real estate investing is. And often I find this is the case.
This is one of the main reasons why people will classify one thing of investing as far as gambling goes. And another thing as far as investing.
It usually has to do with our knowledge or understanding. If you don't know something, this often is considered gambling. Because you don't understand it, you're playing a game of chance.
You don't understand the outcome and the percentage of probability of your returns what's going to happen in the future. Then it is more likely you're going to lose. When it comes to gambling, usually the house always has the odds in their favor.
A certain thing is usually classified as gambling in the following scenarios:
- When you are less knowledgeable about something
- When you don't understand how something works
- When your chance of success is less than 50%
On the other hand, you can look at something that you do understand. Now you know how things work. You're a superstar at that thing.
If you know something and you understand it, this is usually called an investment. The main reason is you know how this works and operates. You know that if you start an internet business, you're not gambling on something.
Yes, you are taking a chance on something, but you're investing in something. This is how many people classify it.
Your friends and family might say that you're gambling if:
- you're doing stock trading
- you're doing stock market game
- you're trading options
That's because they don't know anything about it. They don't understand the business.
If you take any kid or any person and you throw them into real estate investing or acquiring properties more than likely, they're gambling their money. You could say that way as well. But in reality, they have possession. They own something, and this is one of the significant differences behind gambling versus investing. That big difference is ownership.
When you have a problem with your investment or with your item that you have, you have ownership when it comes to real investment.
You have an ownership stake in real estate. You have ownership stake even if it comes to stocks - you own stocks. Even in options, you may own options, or you may have sold options.
But you have some stake in there in the sense of whether you can liquidate part of it for even a fraction.
I know I say the word stakes which can also be confusing. It can be confusing because this is part of that Gambling definition. You have some ownership stake.
Ownership does not necessarily imply a game of chance. When you look at ownership, you can get out with real estate even if something disastrous happens. Let's say you bought a house for $200,000 or $500,000 or $5,000,000. It doesn't matter.
And let's say that house plummets. It goes down to $50,000. At least you get out with something. Now when you play a game of chance eventually what happens, there is you put in your money ($20), and it's a win or loss scenario.
If you lose, you get out with nothing. However, if you win, you get out with something. But here in this case even if you lose you still get out with something. And the same thing goes with the stock market - you always get out with something.
Whereas when you're playing a game of chance or gambling you usually put your money in and you get out with usually nothing if you lose. And you get out with something if you win.
But in real estate, coin investing, automobile investing, stock market, options you typically can get out a lot sooner. Or you can get out at any given point in time with something. You can cash out your real estate holdings and get out with some portfolio within real estate. Or some money.
You can get out with stocks. Typically most stocks don't go to zero especially if you're investing in a big company. Even if the stock was at 50 and you get out of 45. You might have taken a loss, but you're not getting out at a full $0 loss like you would with gambling.
The same thing with options whether you're buying spreads or you're selling option contracts. Even if they go against you, at least you could get out with something because you see the movement and the motion. And in between during that transaction, you can get out.
Pay Attention to These Differences
That's one of the leading significant differences. However, there are a lot of other differences that I want to share with you.
I've created a few different categories that we can discuss here regarding gambling and investing. This hopefully will clear some things and concepts up between the similarities and the differences. Because the overlap as far as the definition goes is quite similar. That's the case especially if you don't understand what type of investing that you're getting into.
First things first. Let's take a look at the significant thing which is the advantage.
A few important questions:
- What happens when you're looking to gamble?
- Who has the advantage?
Well, it's the house or the casino that has the advantage. The casino is always winning. The person who is gambling is still the one at a loss.
When it comes to investing who has the advantage there, it's usually you. If you're looking at a market or just trading it's often the market is always the one that's going to be winning out.
But you get to choose which investments you get into. That is because of the normal tendency or the common trend. This is why I say you are typically the one who has the advantage.
This is what you might be wondering:
- What's the normal trend of a stock?
- What is the stock?
A stock is a company. You're looking for the normal trend of a company to grow in the future. Anytime you're looking at a company you're looking at that company to grow in the future. That's the case because it's looking to expand their customer base and their products.
It's looking to evolve in the future. That's the normal process of a company. You can look at the typical trend as you put money in a slot machine. What's a normal tendency?
Well, you put some money in. Then you lose some. And that is the case. Eventually, you get some, but the overall trend is pretty much to the downside. That's the normal tendency between gambling versus investing.
When it comes to investing the normal tendency is - it's going to go up. Through inflation, appreciation. It's going to go up and the same thing with a stock. You buy a stock like a Tesla and Amazon. It appreciates with time because they're building and growing that company.
Emotional High - Something Worthy of Attention
If you're looking for gambling, most people get in it because of an emotional high. They go to the casino, and they're looking for that hope for emotional high.
It doesn't always happen, but that's what they're trying to do. They're trying to get that emotional high.
Whereas when it comes to investing your basic emotions are flatlined. Or they're low. You're making trading decisions or investment decisions by clear-minded choices.
You're making those decisions based on:
- investigative things
- your knowledge
- those experiences that you have
And you're doing it with low emotional self because you're looking for an investment at a systemic approach.
Quick Look At Systems and Rules
When you're looking at systems and rules, this is what you're trying to do. You have a systematic approach. You could say some people who professionally gamble also have a systematic approach. But for the majority, most people do not have a system or strategy when it comes to gambling.
Most people don't. The professionals - they do. But when you're looking at investing you having a systematic approach whether you want to buy one real estate property and then you have like a system in place.
You might be saying something like this:
"I want to rent this out for three years. Then I'm going to sell it. Fix it up and so on."
You have a plan in mind. Whereas with gambling you don't usually go in with a plan. You go in with a few dollars. You put it in the casino, in a slot machine and you get that emotional high, and that's the main thing with that.
Chasing The Money - Yes or No?
The other thing is frequently you're looking to chase the money. You're looking to chase the money when it comes to gambling. That's the case because you're looking for that emotional high.
When it comes to investing you're not always chasing the money. Of course, you're looking to profit. However, this is not the case when it comes to investing.
Yes, you're looking for growth. You're looking for income, but you're not trying to make a quick buck.
A gambling mentality is this:
"I need to make a quick buck. I need to make this work."
That's why you have those chronic gamblers that keep losing more and more money. That's because they're looking to chase the money. Then they go all in at times, and then they lose a lot of money.
Going All In - Think This Through
When they go all in, they keep losing their money whereas with investing you go in with a portion of your money. Let's say you have a portfolio account or like your total net worth is $1,000,000. You're looking to invest in some real estate property. You might only take 20% of that money and invest it.
The thing is that you're not investing everything that you have. You have a part of that money. The same thing with the stock trading account. You have some trades (four or five different trades set up at once), and you're diversifying. Your risk is a little more defined or more specific.
Whereas with gambling you put all your money in. Then you either have a win or lose outcome. On the other hand, when it comes to trading, you can usually take a part of that investment out.
Even if that stock starts to go down, it's not disastrous. Let's say it is $60 you might be able to get out at $40. Even though it's $20 lower, it's a pretty good percentage of a pullback. But at least you get out with something. Whereas with gambling you don't get out with anything.
In that case with going all-in, you don't have any defined risk. You're not defining anything. Whereas with investing you're defining your risk.
Things that you're defining:
- how much you're willing to put in
- how much profit you're looking to make
- how much money you have
This is a lot more defined. It's more a strategy based.
A lot of times when people go all-in with gambling they also use margin. Now you could do this also in investing. But a lot of times people go on margin and collateral when it comes to gambling - they leverage up. It may even be on credit.
With investing you don't use margin. You can apply for a margin account especially in stock trading. But you don't need to. You could have a cash account and absolutely nothing wrong with that as well.
The Timeframe Is Crucial - This is Why
The timeframe with investing it's much more longer-term. That's because stocks appreciate. They take a bit of time. And you have a strategy in place.
Whereas with gambling you're looking for a high emotional value. That means you're looking for a short term. It's an emotional gain or emotional high just like we talked about already.
With investing it's a much longer time frame. It could be for multiple years. It could be a decade where you're looking to capitalize on dividends or interest. If you're trading options at least, it's a month. Whereas with gambling it could be just for an hour or a few minutes of emotion.
Some People Can Play Cards Without Emotions
Some people play cards, and for them, it's not a game where they're very emotional. They aren't going all-in. They have a strategy and advantage because they know what they're doing. It all comes down to your knowledge and experience.
Keep in mind the bigger picture behind gambling versus investing. It all comes down to risk management and understanding where you have the advantage, the knowledge, and the insight.
Maybe somebody's starting to make fun of you telling you that stock trading is like gambling. The thing is that they probably don't understand the business that they're talking about.
These are the main differences, and I hope it shows you the difference between gambling versus investing. But everything comes down to understanding in the business.