Why is investing not seen as the same way as it is gambling?

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Why is investing not seen as the same way as it is gambling?

In: Economics

Gambling is an exercise of near-term risk with clearly defined terms wholly outside of your control, whereas investing is an exercise of longer-term risk with terms nearer to your control. An informed gambler isn’t usually all that much more successful than an uninformed one over the long term, but a well-informed investor is much more successful than an uninformed investor over over the long term.

Investing is gambling, but a type of gambling with favourable odds. Unless a company goes bankrupt, their stock will trend upwards over the years. It may not go up this year, or in the next ten years, but over the course of a lifetime, it will probably go up.

Investment isn’t normally called gambling because gambling is a term often reserved for betting on improbable things. In casino, for example, every game has unfavourable odds, so people call that gambling. It is the same with other things in life. Education could be called a gamble because after getting a degree, there is a chance that you will not get a job. However, unless you get unlucky, you will probably find a way to make money from you degree. This is why education is seen as an investment, not a gamble.

While both include Risk it might help to conciser the premise behind each, and the influence of Skill vs Chance. Spoiler: Skill good; Chance bad.

Investing grew from the idea of giving someone a loan in exchange for a stake in the business. If the business succeeded, then you were paid based upon the profits, relative to your stake. If it failed, then you lost the value of your Loan. While chance plays a part in a business’ success or failure, it is generally believed that Skill plays a greater part.

Gambling grew out of the ancient equivalent of flip a coin. You place your stake in the pot and a random event occurs. If it’s favorable, you take the pot. If not, you lose your stake. While more complicated forms of gambling have been developed that rely more heavily on Skill, Chance is still seen as the driving force. Even in games such as poker the skill comes in managing the outcome of chance.

Side note: Pinball machines were banned for a while because they were considered gambling. Eventually, the idea that the game was one of skill and not chance helped changed that. ([Link to article](https://www.history.com/news/that-time-america-outlawed-pinball).)

Investing is not gambling.

Putting money into a business, or a money making enterprise in return for part of the profits is not gambling.

Speculating is gambling.

Buying and selling stocks in the hope of a short term rise in price is gambling.

You can never have enough information to make a true informed decision, and you can never truly predict the actions of other speculators, which directly effect the value of a share.

Investors can make a return consistent with the growth of the market.

The long term results from speculation are more consistent with random chance.

Gambling in a bookkeepers, or a casino, you’ll never make a profit. The odds are stacked in such a way that the house wins, over all of the games played or bets placed.

In comparison, investing money tends to give back more than you put in, because then other people do actual work and you ~~steal~~ ~~take~~ receive some of the profits of those people’s work.

when you gamble, the house is expected to win so in the end, you’re expected to lose money.

When you invest, stocks typically go up in value in the grand scheme which is why diversifying is recommended. The expected value of this action is to make money.

A lot of people see day-trading as gambling which is a riskier way to work with stocks.

The difference is the probability of recovering your money. Gambling on slot machines or card games has the odds heavily stacked against you. The probability of winning anything is quite low (less than 1%), but winning gives you many many times what you put in (100-10,000 times what you put in)

Investing in equities (the stocks that go up and down in relation to how well the company is doing) is also quite risky (and there’s no way to calculate the probability of making a profit), but the payouts can be quite significant (2-10 times what you put in).

Investing in bonds s quite low-risk but the payout is also relatively small. Bonds give guaranteed return in the form of a fixed percentage called a “coupon” paid to you every year or twice a year. Then you get all your money back when the bond reaches “maturity” in a few years. Typical coupon is 2-10% per year, so for every $100 invested you’ll make $2-$10 per year and then get to keep your $100 when the bond reaches maturity date. The only way you lose your money is if the company issuing the bonds goes bankrupt by maturity date.

Gambling is about the distribution of some fixed pool of money. Everybody pays in a certain amount, something unpredictable happens, then everyone collects a certain amount based on the outcome of the unpredictable event. The only value created by that activity is the excitement of maybe winning a lot of money. Nothing is added to the pool. If you won money, it came directly from someone else. Economists call this a “zero sum game” because the winnings and losings must sum to zero.

Investment is about mutually beneficial exchanges of money across time. It typically involves someone who needs a lot of money NOW (often to start a business) and someone else who is saving money to use it for later. The first person pays the second person a fee (interest) in return for borrowing their money. This allows people who aren’t independently wealthy to start businesses, own homes, go to college, etc. and generally contributes positively to the economy. Like in a lot of economic activity (but unlike gambling), both parties are better off for having made the exchange. The game is not zero sum.

Investment CAN involve a lot of risk. It’s never possible to know for sure whether the person you lend money to will actually succeed and/or pay you back. There are ways to behave in investment markets that ARE essentially gambling, and they tend to get hit with the label of “speculation.” On the other hand, there are many investments (government bonds, CDs, etc.) that are pretty close to risk free. (A US treasury bond might not pay out… if the entire federal government collapses, but in that situation you probably have bigger problems anyway).