Investing or gambling?
I am reading a book called ‘Investing for Dummies‘. Its about investments and the stock markets and it is very interesting, but what Im seeing and reading, seems to me to be that the stock market and investments around that, are just like gambling. There is no guarantee that you get your money back.
So what IS the difference between ‘investments’ and ‘gambling’?
In layman terms — delayed gratification.
People who gamble are doing it for entertainment, are willing to accept a complete loss (i.e. they expect to lose since the house has an edge), and most importantly, they want the thrill of immediate gratification akin to a high.
In contrast, investment is for a purpose, be it for retirement at the end of a career, or to save up for the down payment of a new car or house. There is a proven investment process called value investing espoused by Ben Graham that has created enormous wealth for its practitioners. While the stock market has built disadvantages such as a bid-ask spread and leakages such as commissions, numerous investors have nonetheless created wealth. Lastly, returns from investing activities accretely slowly but due to the 8th wonder of the word (compound interest), the dividends can be massive in the long run.
I hope this helps you to get a better grasp of investing as opposed to gambling.
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With investments, if you take the time to understand what you are investing in and really understand the market then it is not gambling. (Gambling implies just throwing your money away with very little hope for an actual return). With investing, if you are prudent and do your research then you will most likely earn at least a modest return. I’m not a gambler but I do invest in stocks and bonds. I’m an MBA student and I work too. I’ve worked in banking and investments. I passed the Series 7 exam. My dad has been a long time investor. He’s not a gambler. He won’t invest any money in a business he doesn’t understand.
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There is absolutely no doubt that what you say is correct. I have gambled in Las Vegas and I have invested in the stock market.
You will have individuals tell you there is a lot of difference. And there is not. However, fixed income investments, like CD’s offer no gamble.
Your assessment is right on track.
Get ready for all the stock experts to tell you why the stock market is not like gambling. LOL
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Investments are when you have money and there is a greater chance of getting it back than when you gamble, but as you said not necessarily. Usually people who gamble don’t have any money and don’t make any either, apart from professional poker players.
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In layman terms — delayed gratification.
People who gamble are doing it for entertainment, are willing to accept a complete loss (i.e. they expect to lose since the house has an edge), and most importantly, they want the thrill of immediate gratification akin to a high.
In contrast, investment is for a purpose, be it for retirement at the end of a career, or to save up for the down payment of a new car or house. There is a proven investment process called value investing espoused by Ben Graham that has created enormous wealth for its practitioners. While the stock market has built disadvantages such as a bid-ask spread and leakages such as commissions, numerous investors have nonetheless created wealth. Lastly, returns from investing activities accretely slowly but due to the 8th wonder of the word (compound interest), the dividends can be massive in the long run.
I hope this helps you to get a better grasp of investing as opposed to gambling.
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In his book "
How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition", William J. O’Neill, the creator of the Investors Business Daily, and the only person who has created a database that tracks every stock for the last 5 decades, discusses and shares techniques that will help you remove the emotion from investing, which is what gets so many people into trouble. People have their "pet" stocks, their companies they just love, blah blah blah, ad nauseum. The fact is, unless you treat investing as a serious business, you will lose. If you treat it properly, using techniques that are NOT based on another person’s opinion, but on hard long-proven fact, then your chances of success are greatly improved. Nothing is a guarantee, but risky investing can be converted into sound investing with great risk management principles. It is this that will be the winner for you. I have used his techniques, and from his principles and indicators to watch, I created a Stock evaluation questionnaire for myself and I use it religiously. If a stock doesn’t measure up, then no matter what the pundits say on Bloomberg, Motley Fool, Wallstreet Journal, etc., that stock is not ready to make the price move I am interested in, and I keep away from it.
Get that book, throw away that Investing for Dummies book (sorry I couldn’t have stopped you before you bought it) and be a humble learner from this master, William J. O’Neill.
Best of success, for it will be yours if you learn the right tools to use, and leave the garbage behind.
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http://www.investors.com
Keeping it simple here since there are so many long descriptions!
Investing you don’t lose all your money. You can lose and gain it back.
Investing for me using a card sense would be like this. There are 5 card players at the table. I get to see everyone’s hand. If someone has a great hand and consistently knows how to win, I am going to give him my money in return for more later on hopefully. You might gain some, lose some but over time hopefully you will have more money when you decide to cash out.
Investing is researching great companies and deciding that it is a company worth buying into. Gambling is guessing with most odds against you and hoping that you get lucky.
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With an investment you are buying part, however tiny it may be, of a company or what is called the equity. This entitles you to a tiny part of the company’s profit, some of which is paid to you in the form of a dividend. Now if that company is big, diverse, well managed etc. and who’s management & employees are working to further the interests of the company (and themselves) it has a good chance of growing and increasing it’s profit and thus the dividends it pays to you. You can see this by looking at a company’s history. Furthermore those earnings (or profit) can be calculated to show you how many years it will take to pay back the price you paid for the shares. No doubt you have heard of this, it is called the Price/Earnings ratio or P/E for short. Now does this sound anything like gambling? If it does you need to read a few more books.
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I agree with the answers that admit investing and gambling have more in common than differences. The crucial difference is that in gambling the odds almost always favor the house, whereas the stock market has shown a long term upward trend that makes the odds favor the gambler, er I mean investor.
This evidence that the odds are in your favor is why strategies exist such as "buy index mutual funds and hold long term". To use such a strategy is to give up all hope of outperforming the market in exchange for a reasonable expectation of matching the long term performance of stocks. If the long term trend were flat or negative, "buy-and-hold" would have disastrous results. But we optimistically expect the long term upward trend to continue and reap the benefits of returns of about 10% per year.
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Overall if you invest your money with the right companies you will get a return over the long term.
If you take your money to a casino in the long term the house will win and take all your money
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If you buy a stock without any research and evaluation, that is gambling. Buying a companies stock because you want to own that company going forward is investing. The reasons people want to own a company vary.
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As it pertains to the Public, there is no difference. Investing is gambling. The public is always on the wrong side of the game. They buy when they should be selling. They sell when they should be buying. They have no clue what they’re getting into. They "think" they do because they read books on investing and they do "research."
For the people who make the rules, namely the investment banks and other entities in the finance world, it’s NOT a gamble.
That’s why I always tell people if they REALLY want to make money, or at least know what’s going on, they need to work in an investment bank.
Move to Wall Street and get a job. Then you’ll have a clue. You may not become richer, but you will have a better understanding and not make the mistakes that the uninformed make.
Even though I offer a website explaining some simple trading rules … I offer this because people will want to trade, no matter how bad it is for their financial health … I strongly recommend you DON’T TRADE.
Unless you know what you are doing, which means that you have inside knowledge, which in all likelihood means you are not posting questions on yahoo.
Trading or investing is not going to net you anything at all in the long run, unless you are prepared. Being prepared does not mean reading books on investing or trading, it does not mean conducting research, believe me. Being prepared means having the inside knowledge that comes from working in the business, not trying to guess it from the outside.
But if you are stubborn and want to trade or invest, then I suggest some simple strategies to MINIMIZE the damage you do to yourself. Those are on the website: http://commonsensetrading.googlepages.com
These strategies will work for ANYONE because they do not require a background in finance or mathematics … which would be most of the readers here.
The sole reason I answer questions on yahoo is to help uninformed people MINIMIZE the damage they do to their wallets that comes from following the plethora of misleading advice that gets thrown at them.
The best way to minimize the damage is to NOT TRADE.
Put your money into interest bearing instruments. Save money. Reduce your debt. Get promotions at work. Increase your education. Any of these Risk-Free methods for improving your finances are better alternatives.
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The difference is that investing is not a zero sum game. You and your 4 best friends sit down and play poker all night and you each brought $100 with you. Regardless of who’s up or down, between the five of you there’s still $500.00.
With investing, your money is put to work to create goods & services, and if the place you invested it in does so well it becomes profitable and there is a net gain in wealth.
What investments do have is risk. There are all kinds of risks invovled with investing, and different investments have different kind of risks. Professional money managers are more risk managers than anything else.
But what about these derivatives? OK, yes by themselves most derivatives are a zero sum game. But derivatives derive their value from some other investment. The purpose of derivatives is to allow investors to tailor the risk profile of an investment to suit their need. One party takes on certain risks & returns of the investment, while another party gives up risks & returns related to the investment.
Its all part of the great global world of finance.
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You may also like to read Value Growth Investing by Glen Arnold
and The Intelligent Investor by Benjamin Graham
These books clearly distinguish between what makes an investor over a gambler.
The investor chooses a sound company with good earnings and good earnings potential. He buys it at the right price and holds on to it, happy in the knowledge that whatever happens to the price of the share, he’s still got a good buy, and there’s no reason to sell it unless the fundamentals of the company have changed.
A gambler would put more significance on the price of the share, and focus more on "betting" that it’ll go up or down, which is rarely a wise strategy.
If you think about it, the reason gamblers tend to lose is because it’s hard to know when to stop playing. They can be on a winning streak, having found a system they think works well. So if the system works, why stop? So they keep going. Eventually the system breaks down and then they stop when they lose. So they’ll only ever walk away with a loss.
However, if you’re not speculating, but investing in a good company, the shares can go up, down, all over the place and it doesn’t matter. You don’t stop when you’re losing. If you’ve got a good company there is rarely any need to sell it. So you don’t stop and pull out when you’re losing, because you’re sure it will go up again. And that’s why it’s an investment and not gambling.
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The risk.
Perhaps too, that investment presumes a win-win rather than zero sum.
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March 7th, 2010 at 1:51 am
investing, is strategically investing your money in diversified securties so your risk level is reduced while remaining with the highest return possible. Investing in the stock market has proved to be a safe LONG TERM investment. on average since 1940 the stock market has returned an average of 10.4% per year. No other investment can match that without increasing your risk dramatically. Risk is measured by beta. a beta of 1 would be equal to the market as a whole. Anything higher would be riskier. Now you still have to diversify and invest in multiple stocks 100-125 to build a well diversifed stock portfolio. If you dont ahve that kinda money, mutual funds are already diversified. you have to pay the fee for those funds though, but gambling would be putting all your money in 2-3 stocks and hoping for a lucky one. Investing in single stocks is gambling, if you have sufficient information that this stock will be increasing, good, but you should watch your investments VERY closely and get really to cut your losses or close out your gains if you make money.
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