In both gambling and investing, a key principle is to minimize risk while maximizing profits. But when it comes to gambling, the house always has an edge—a mathematical advantage over the player that increases the longer they play.
In contrast, the stock market constantly appreciates over the long term. This doesn’t mean that a gambler will never hit the jackpot, and it also doesn’t mean that a stock investor will always enjoy a positive return. It is simply that over time, if you keep playing, the odds will be in your favor as an investor and not in your favor as a gambler.
“Neither get in nor get out is an investing strategy. Period. That’s just gambling on moments in time. And investing should always be a disciplined process over time,” said Liz Ann Sonders, managing director & chief investment strategist of Charles Schwab.
Mitigating Loss
Another key difference between investing and gambling: You have few ways to limit your losses. If you pony up $10 a week for the NFL office pool and you don’t win, you’re out all of your capital. When betting on any pure gambling activity, there are no loss-mitigation strategies. Newer innovations to online sportsbooks have been added to help gamblers mitigate risks when betting on games such as in-play bettering, which can be changed throughout gameplay, and partial cash-out options, which allow recovery of part of one’s wager if an outcome seems to be going against the best.
In contrast, stock investors and traders have a variety of options to prevent total loss of risked capital. Setting stop losses on your stock investment is a simple way to avoid undue risk. If your stock drops 10% below its purchase price, you have the opportunity to sell that stock to someone else and still retain 90% of your risk capital. However, if you bet $100 that the Jacksonville Jaguars will win the Super Bowl this year, you cannot get part of your money back if they just make it to the Super Bowl. And even if they did win the Super Bowl, don’t forget about that point spread: If the team does not win by more points than given by the bettor, the bet is a loss.
The Time Factor
Another key difference between the two activities has to do with the concept of time. Gambling is a time-bound event, while an investment in a company can last several years. With gambling, once the game or race or hand is over, your opportunity to profit from your wager has come and gone. You either have won or lost your capital.
Stock investing, on the other hand, can be time-rewarding. Investors who purchase shares in companies that pay dividends are actually rewarded for their risked dollars. Companies pay you money regardless of what happens to your risk capital, as long as you hold onto their stock. Savvy investors realize that returns from dividends are a key component to making money in stocks over the long term.
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