Gambling vs investing: What do you need to know?

By Louis H-P on December 16, 2022

The rise of new and exciting asset classes such as cryptocurrencies has created new topics of conversation. Gambling vs investing is one of them. This has been circulating in investor circles with increasing frequency. One such topic is the extent to which gambling and investing are separate. However, while gambling and investing involve choice, risk and uncertainty of outcome, is this also to say that they are the same?

Why is gambling vs investing in the news?

Although at first glance this might seem like a slightly absurd topic given the clear differences. Investing means holding established asset classes that will more than likely return a profit to you in the long run. This is versus putting down wagers at an online casino. The emergence of games such as online baccarat with Bitcoin have muddied the waters in recent years!

Investing and gambling are activities that both involve high levels of risk and choice on the part of the individual partaking in either activity. Both activities require an individual to risk capital. This is either in the form of a wager or a cash investment, with the hope of making a future profit.

Similarly, both activities are also defined by the uncertainty of whether that hope of future profit will actually come true. We should first set out a working definition of what exactly investing and gambling entail.

What is investing?

At its most basic, investing is the process of putting resources or capital. This is typically money, which is introduced into a business or financial venture with the hope that it will provide future returns.

This return usually comes in two forms. Either in the form of an income, such as stock dividends, or by asset value appreciation, which is realized when you sell it. You might also invest to produce both an income and an appreciation in value.

What is gambling?

Gambling involves trying to predict what you think the outcome of a particular event will be. (And then making a bet on that basis). We could define ‘gambling’ as staking something, usually money, on a specific contingency.

Key differences

One of the most obvious differences between gambling and investing, is that each activity tends to be done on completely different timescales. For the vast majority of investors, investments are made on relatively long timescales. This could be months or, as is more often the case, years.

Gambling is very much a time-bound event, while an investment in a company will usually be made for several years. Longer timescales allow the investment to have a better chance of growing. The key difference is that investors will usually be rewarded for working on longer timescales, while there is no such incentive for gamblers!

Another key difference between gambling and investing relates to the knowledge requirements of each activity. Generally speaking, investment decisions draw on a wider range of information.

In contrast, gambling wagers tend to rely on odds that have been provided by betting platforms. You will also need to have a good understanding of the rules of the game and to be able to understand the probabilities you are playing with.

What similarities are there?

One of the most obvious similarities between gambling and investing, is that both activities deal with uncertainties.

Uncertainty

When you are placing a wager or bet, you never really know how things will play out. You simply have a hunch and place a bet on the basis of that hunch.

Similarly, when you are choosing an investment to make, you are never fully certain of how things will play out. Instead, you are making an informed guess about the outcome you expect you will see.

Risk

Another similarity in gambling vs investing is that both require you to be comfortable with a certain level of risk. In gambling, this is the risk that the expected event will not actually happen. This uncertainty is an inherent part of gambling and is arguably what makes it such a popular pastime.

Similarly, if you want to invest consistently over the course of your life, you will have to become very comfortable with a certain level of risk. Unexpected events can very easily happen in your chosen industry. This could render your investment strategy null and void in an instant. This is an unavoidable part of investing and is something you need to become comfortable with.

Regulation

Another more unusual similarity is that gambling vs investing are tightly regulated activities.

Although these regulations will vary around the world, gambling platforms and investment platforms both need to abide by strict regulatory requirements. Without these, they would be unable to provide their services to customers.

What’s the difference?

Investing and gambling both involve individuals risking capital, which is usually in the form of money, in the hopes of making a profit. Both gambling and investing are also characterized by the need to strike a careful balance between risk and reward.

Conclusion

However, both activities are ultimately different. This is to the extent that gamblers often have much less information to base their decisions on. Thus they have fewer ways of mitigating risk.

With that said, you might find that the experiences of one of these activities enhances the other, despite the differences!

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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