Myth: Investing is just like gambling
False! If you think investing and gambling are similar then think again. The two are very different; here’s a quick look why:
Unfortunately, the belief that gambling and investing in stocks is somehow alike is a reason which leads many of us to shy away from the stock market and investing altogether. After all, why would you want to throw away your hard-earned cash on nothing more than a game of chance?
Let’s get this straight: investing is inherently different from gambling. Many people forget this but when you are buying a stock, you are buying ownership in a piece of the company. You become a shareholder and are investing in that company. By owning a piece of the organization, it entitles you to a claim on a fraction of the profits that the company generates through an increase in share value. Investors are constantly trying to assess what this level of profit will be and this is one of the main reasons why stock prices fluctuate.
As an investor, you too are trying to guess what the future profits of the company will be like. If you think prospects are good, you invest. It sounds simple but assessing the value of a company isn’t an easy thing to do and there are many short- and long-term variables that affect prices. There are numerous schools of thought on how to decide whether a company makes for a good investment or not, and many leaders and professionals have mass amounts of published content about their strategies. It’s ultimately up to you to decide which companies to invest in but, over the long-term, creating value for its shareholders is a prime goal for all companies, which in turn means increasing the value of your investments. (This certainly doesn’t mean every company is guaranteed to create profits, but they undoubtedly do try!)
Gambling, on the other hand, is a zero-sum game. One person’s gain is another person’s loss and most importantly, there is never any creation of wealth. Yes, gambling can be fun, exciting and entertaining! But as a savvy citizen, you must know that the odds are against you, especially so at casinos. Why else would casinos still be in business? It’s certainly not from the sale of drinks!
There are some similarities of investing and gambling. Gambling and investing involve risk and choice and in both cases, the gambler/investor decides exactly how much risk they want to take on. However, one of the key differences is the ability to mitigate your losses: gamblers have no strategies available to them to hedge their bets. On any one given bet, you either win all, or lose all. On the other hand, investors have a variety of tools available to prevent total loss of risked capital. If for example, your stock drops 10% below its purchase price, you still have the opportunity to sell that stock and retain 90% of your capital. Gambling is a speculative activity which does not allow for individuals to minimize loss.
So take a moment to think about how investing and gambling are different. Investing is about creating wealth, gambling is not.
If there’s one thing that you learn today, let it be this: investing is not gambling!