It is a common prejudice that the stock market is a lot like a casino, with investors frequently pictured as gamblers playing a risky game with their capital. This view has become especially prominent after the financial crisis of 2007-2008 that demonstrated the dangers of uncontrolled risk-taking by financial institutions.
In reality, a more nuanced view is required to understand what investment is about than simply drawing an analogy with gambling.
Luck vs Knowledge
First of all, gambling is often not all that risky. There are numerous websites, such as penn-casinos.com, offering free games that players can try out before deciding to try their luck with real money. Moreover, many forms of gambling, such as poker, require skill and strategy in addition to luck.
That being said, the main difference between gambling and investing pointed out by professionals is that unlike gambling that requires luck to win, investing in stock markets requires a great deal of knowledge and skill. In other words, although investors can engage in the gambling-like behaviour, an investment that is similar to gambling is a bad investment.
Investment is based on information about the company and the product, and it requires complex strategy. Failing to properly study the prospects and consequences of an investment means losing control over your choices and leaving the outcome to chance. Essentially, if you don’t do a thorough market research, and if you don’t base your decisions on this information, you are gambling.
Investment is about managing risk. The risk is always involved because no one can predict the future with absolute certainty. Knowledge is the main factor distinguishing responsible investment from gambling.
To the extent that you can develop a strategy that can increase your chances of winning in the long run, gambling can be similar to investment. But the similarities end there, because the amount of sheer chance involved in gambling is never as high in investment. Additionally, the edge you will get from analyzing sports games or laws of probability is significantly smaller than the one investors will get from studying the market, because believe it or not, the market is much more predictable than the outcome of games of chance.
Know Your Motives
This is not to say that investors don’t engage in the gambling-like behaviour. Indeed, many inexperienced investors can let themselves be carried away, attempting to chase their losses and letting their emotions cloud their rational judgment. If you are an investor and you want to check whether you are behaving like a gambler, examine your motivation. If you are trading for excitement or in order to win, you are closer to a gambling mindset than that of a methodical and systematic investor.
Finally, a word of caution for new investors: steer clear from attractive online offers that sound too good to be true, promising a quick and easy way to generate huge returns. Investment is a long-term occupation, and smart investors are ready to accept occasional losses in order to stay profitable in the long run.