One of the most common comparisons in finances is that of the stock market to a giant casino. Especially after the last stock market debacle, comparisons to stock investing and gambling began cropping up again. And, while there are some similarities between these two activities, perhaps saying that investing is just like gambling is going a bit too far. There are enough differences between the two to make investing a better choice for most people.
Similarities Between the Stock Market and the Casino
The main similarity between investing and gambling is that you are taking a chance. There is no way to predict, with any sort of real accuracy, what will happen next. You can’t be sure of what will happen in the stock market and you can’t really be sure of the outcome of your gambling.
Many investors show traits similar to gamblers. They put their money in and expect that they will win. They feel they are lucky, have the right skill or simply have a system that will enable them to come out ahead. However, this doesn’t mean investing is just like gambling. Indeed, when you think about the aspects of the stock market and a casino, investing starts to look a little less like gambling.
Investing is Still Not the Same Thing as Gambling
Yes, you are taking risks when you invest. However, in many cases, you have the chance to take an informed risk. You can do your research and choose investments that are likely to do well. You can limit your risk with the help of a careful vetting of your investments.
In gambling, you can use some skill to figure out probabilities and read other players, but in the end, if you don’t have the right cards you lose. With investing, you might see setbacks, but if you have done your research you can overcome them by riding out the storm.
Another key difference is that with stock investing, you have the opportunity to share in the general success of the market. You can put your money in a casino and get some chips in return. If you don’t make any bets, you can cash in your chips and get back exactly what you put in.
However, with the stock market, you can put money in an index fund and let it sit. In the end, you can share in the market’s success, even if you don’t make further trades. If the market goes up, you get a portion of the profits–even though your money just sat there.
You can also consider that even if your investments have a down year, you might still come out ahead. If you invest $2,000 to buy 200 shares of a $10 stock, then let it sit, your holding may double as the stock grows to $20 a share. So now you have $4,000. But what if a crash comes along, sending your stock down to $15 a share? Now you have $3,000. Yes, you’ve lost $1,000 from where you were before, but you are still ahead of what you put in originally. You might have time to recover later, too.
When you gamble, that money is gone. You can try to make up for your losses by putting in more money and making more bets, but if it doesn’t work out you still lose it all. You are likely to lose the moment you put your money on the table. However, with investing, you don’t lose until you exit your position. Plus, you can’t deduct gambling losses on your taxes like you can investment losses.
In the end, how you feel about gambling vs. investing is largely a matter of opinion, but there is one more similarity between the two: It’s best to quit while you’re ahead, rather than trying to push your luck.