Why investing is not like gambling

People unfamiliar with share investing often compare it to gambling at the casino or the track. At first glance, it can seem like the share market is like a casino where you place bets on a stock and hope that it does go up. However in this article we outline reasons why there is a distinct differences between the two. There is a higher probability of creating wealth by saving a little each month and putting it in the stock market as opposed to using those funds to buy a lottery ticket on a regularly basis.

1.Risk Control

You can control the amount of risk you want to undertake in the share market.  If you are a conservative investor then you can take positions in stocks that aren’t too volatile and generate income. If you are a high-risk trader, you have the option to take on trades which can generate capital growth at a faster rate but are also carry a higher level of risk.

The share market allows investors to further reduce risk by diversification. This means investors can invests in different industries and spread their risk.

Investors also can place stop losses so they will only lose the absolute maximum they feel comfortable with. When individuals gamble there is no risk mitigation methods, you are basically putting down all your money in the hope that you win and if you don’t, you lose all your money.

2.Compounding

The share market can offer investors a slow but steady way to increase wealth through compounding. An investor can invest in a stock and when they make money they can then use the profits and capital to invest in something else. Therefore they compound their earnings over time. Warren Buffet has made the following quote about compounding: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett

3.Losing all capital

Gambling requires all capital to be at stake and the player can lose it all in one game. However when investing in the stock market the investor does not lose it all in one go. Even if a stock has a big drop in its share price in one day, it is highly improbable the investor will lose all their capital all at once. Gambling is speculative and individuals cannot minimise loses.

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4.The house always win

Casinos are big businesses looking to make money so the odds that the house will win are high. Investors would have a higher probability investing in gambling stocks and making money from share price increases as opposed to gambling the money away. The share market has increased over time so share investors would have made money by investing in the market long term.

5.Time Horizon

The longer you keep playing, the more potential you have of losing your money when you gamble. The longer you invest in the stock market, the most probability you will make money. Individuals are also rewarded for their time in the stock market with dividends. When you gamble once the game is over, the potential to make money is over.

6.Publicly available information

Analysts study stock fundamentals and decide what stocks to select based on company statements which are publicly available. They can avoid companies which display weak financial positions. Gamblers have no information on how a much a poker machine has paid out in the past. When they play the pokies, their winnings will be based on luck and not skill. This point is also linked to risk mitigation as investors have more control over the level of risk they want to put their investment in. In gambling there is no such control.

Lauren Hua is a private client adviser at Fairmont Equities.

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