Due to the No Arbitrage Principle, in theory, there should always be risk when you invest, however investing is seen as smart common sense which every adult needs to do whereas gambling is a poisonous addiction we need to curb, what’s the difference? To me, it seems that only when the market is exploitable and not fair, is there a true difference, apart from the immediacy of the results of many types of gambles vs the drawn out nature of investments
In: Economics
Investing is gambling. However, the nature of the game is different. When you gamble, the casino sets the odds so that they will pay out less than they take in. Some people win, but most lose. With investing, the general trend in stock prices is up, because almost everyone involved benefits when stock prices increase.
it depends on what you mean by “investing”. picking single companies has a lot more risk than buying the s&p500; but even the s&p500 has some risks.
stocks also arent lottery tickets; behind every stock is a company…….with earnings, expenses, sales, R&D and all that jazz.
When you gamble, it is against an entity who is setting the odds in their favor. So no matter what, over time you will lose more than you win (if you continue to play).
Yes, investing is a bit of a gamble. But remember, not all investing is just buying a single companies stock. There are tons of funds that buy various stocks and bonds. So even if one particular stock in a fund goes down in price, that doesn’t mean they all did.
And things like government bonds always pay their interest. If they don’t, then the government has likely failed, and your money is likely worthless no matter what form it’s in.
The main distinction between the two is that when investing, you are actually buying and selling something, a share of a company. When you buy stock, you own a portion of that company. If the company makes a profit, you can be paid out in the form of dividends. If you own enough stock, you get a say in how the company is run.
Whereas with gambling, you only buy a temporary agreement if X happens. I will pay you Y money, with X usually being an event determined largely by chance.
Investing is buying something and hoping to sell it on again at a higher price or earn money by holding assets. Gambling is a game of chance to win money with the odds stacked against you.
The reason that investment and gambling are treated so differently is due to the mathematical principle of expected value or how much value (money) you are expected to fain or lose in a given situation.
For example in a roulette table with 50 red 50 black and 2 green with a 2:1 payout on the correct colour you have a 50/102 or a ≈ 49% chance of doubleing your money but a 52/102 chance of losing your money this means that the expected value is how much you are likely to win 2 × 50/102 ≈ 0.98 minus the amount playing the game cost (1) for a total expected change in value of -0.02 (you are statistically going to loose money)
Where as the expected value for investing is positive, much harder to calculate than a simple casino game, and not all stocks are good investments, but a good investment has a positive expected value which means that on average you will make money rather than lose money.
The difference between gambling and investment is earnings. Gambling is purely speculative. A lottery ticket once bought may be worth a ton of money, but probably its worthless. Its all up to magic number coming out of ball machine, there are no real productive assets behind it.
If however you buy an apartment and rent it out, the rent payment is very real revenue and most of it pure profit. And also the underlying asset is concrete physical thing with real value and utility.
Most investments are honestly somewhere between the two, there is still still a speculative aspect to every investment, a company may succeed of fail beyond expectations and thus go up or down in value, but the important bit is that it earns or is expected to earn money for its owners no matter what the market price is.
Most of the gambling is uninformed betting. You don’t have any information on the lottery numbers of next week or the next number on the roulette. It’s a blind bet.
Investment is an informed bet, aka speculation. You can lose, you can have the wrong information or the wrong math, but in general you plan ahead using whatever good or bad information you have. Like, buying a house assuming that the house prices will go up – it’s investment even if later you happen to lose, because you did calculations and future predictions based on data.
Obviously some people do gambling with investment assets, like buying and selling random stocks and hoping for the best but it’s not investment, it’s gambling in disguise. Also sometimes people have more information on some bets that are seemingly gambling bets so it’s investment for those people. Like, there was this scandal many decades ago when a hacker somehow figured that a certain button combination triggers a bug in the slot machine, so they turned gambling into investment. They still needed some initial investment but the cash-out was reliable.
Gambling is playing at a disadvantage and hoping to be lucky to overcome it, that’s why the casino is not said to be gambling, just the customer. Investment portfolios have a long term positive return, especially actively managed portfolios.
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