Many people think investing and gambling are similar.
You buy a stock, and if you’re fortunate, its price goes up. But if you’re out of luck, you could lose your money.
So, is investing gambling?
Or is there a way to make money on the stock market without taking undue risks?
In this post, we’ll address these questions. We’ll also provide you with some tips that you can use to invest safely and wisely.
Investing vs. Gambling
Before addressing the “is investing gambling” question, let’s understand what these terms mean.
People that know how to invest don’t do it on a whim, but they analyze all the options, weigh the pros and cons, and calculate the ROI. Then they make an informed decision.
Gambling is totally different.
When gambling, you place a bet on the outcome of an event. Typically, there’s no skill involved. For example, if you buy a lottery ticket and you’re lucky, you could win. But the most likely result is that you’ll lose your money.
Buying Stocks: is investing gambling?
To truly understand if buying stocks is like gambling, we need to analyze how the stock market works and the returns it can give investors.
Stock market: it goes up and down
If you go about it the right way, buying stocks can provide you with high returns on your money.
Let’s take a look at some data. The S&P 500, a stock market index of 500 of the largest companies listed on stock exchanges in the United States, has provided a return of about 14% per year over the last five years. If we consider a longer period of ten years, the annual return is slightly lower at approximately 11.7%.
Here’s a chart that illustrates the rise of the S&P index in the period from 1990 to 2021:
If you look carefully at the chart, you’ll see that the index representing the values of the top 500 stocks in the United States has climbed from a level of less than 500 to well over 4,000 in the period we’ve considered.
Of course, the returns aren’t consistent. In some years, the S&P 500 index has taken a beating.
In 2008, it fell by 38.49%. If you had invested before the crash, you would have lost over a third of your money. But the S&P 500 index bounced right back. Here are the gains it has made in recent years:
But, like there are rises, there are falls, like we’ve seen, it can be volatile. This is what many people think of when they hear “stock market” and why some think of it as gambling.
But really, is investing gambling?
Let’s see how much profits one can get from investing in stocks and how people choose stocks (hint, it’s not just choosing a random stock as if you were choosing lotto numbers).
Investing in the stock market: profits
What if you bought stocks of a specific company?
If you choose wisely, this can be a very lucrative option.
Let’s take the example of Apple stocks.
The iPhone maker went public in 1980. The issue price of its stock was $22. If you had put $1,000 into Apple stock and held on to it, your investment would be worth about $1.2 million today.
Yes, you read that right.
You would have become a millionaire by investing $1,000. Of course, Apple isn’t the only company that has provided its investors with high returns. There are dozens of firms that have consistently increased their revenues and profits and rewarded investors handsomely.
That’s where investing in stocks differs dramatically from gambling: it’s not a wild guess, rather an educated guess that takes into consideration many different factors, like
- the history of a company’s stock
- if the company will have any changes in the near future
- the state of the economy
Plus, professionals don’t expect instant returns; they know it’s a long game.
Keep in mind that buying individual stocks is a far riskier approach. It’s possible to lose a part of your capital or even all of it.
For most people, an S&P 500 ETF offers the best option.
When you buy an S&P 500 ETF, you’re purchasing a small part of the top 500 publicly listed companies in America.
Some of them will be highly profitable. Others may not do as well. On average, over the long-term, you’re likely to earn a return that’s significantly more than you can make on, say, a bank deposit.
Historically, the S&P 500 has provided an annual return of about 8% since its inception in 1957.
There are several Exchange Traded Funds (ETFs) that track the S&P 500. Many of the funds don’t stipulate a minimum investment amount. So you can start with as little as a few hundred dollars.
Day trading: closer to gambling?
Now, let’s come back to the question we started with: Is investing gambling?
If the stock market can give investors the type of returns we’ve described above, why does it have such a bad name? Why do many people ask the “is investing gambling” question?
You should know that so far, we’ve been talking about long-term investments. If you’re willing to deploy your funds for five or ten years, or even more, you’ll likely make good money. But that’s not the only way to buy stocks.
Some people want instant returns. They prefer to buy a stock and sell it on the same day. They are called day traders.
Day trading is a form of speculation. It’s a bit closer to gambling. Most day traders lose all their capital. Even if they do make money on some days, they usually lose it subsequently.
Why? Because it’s impossible to predict the short-term movement of stock prices with any degree of accuracy.
A study titled Day Trading for a Living?, conducted in Brazil, found that 97% of day traders lost money. Only 1.1% made a profit equal to the Brazilian minimum wage.
Another study, this time in Taiwan, found that “…more than eight out of ten-day traders lose money”.
So, is investing gambling?
Well, now you can see the answer is not as clear as a “yes” or a “no,” it’s a bit more complex than that, and it all comes down to how you decide to make your stock investments.
*If you have a long-term view and put your money into an investment vehicle like an S&P 500 ETF, it isn’t. But if you’re looking for the instant gratification and adrenaline rush that day trading can provide, you might as well play the lotto.
Certainly, you can take the smartest route and buy stocks from companies that are proven to have healthy finances and a rising stock price. There will be risks, of course, but if you’re informed, they won’t be as high. Even better, you could hire a professional to help you with it.
And, on the other hand, you could definitely go at it like the day traders, which is a more volatile way of trading stocks. Of course, to truly day trade like a professional, you need to educate yourself in everything finance-and-stock-related. This type of trading does require good background education because as easy or random as it might look, there’s more to it.
Or, of course, you could just gamble away and treat the stocks like a horse race or the lotto. You could win money, but the possibilities are incredibly low, and you could actually end up losing all your money.
5 tips to safely invest in the stock market
If you’ve got the answer to the “is investing gambling” question, and you’re convinced that the stock market can be a profitable investment option, here are five tips to guide you.
If you follow these tips, the stock market will be more like smart, savvy investments and less like gambling:
1. Get the help of a professional
The stock market can be a complex thing, but that should not stop you from investing.
The best way to make sound decisions is to hire a professional that understands the stock market. They can guide you through the process of choosing and buying stocks.
Or you could hire a stockbroker altogether, and they’ll handle everything for you.
2. Buy an S&P 500 ETF
For the vast majority of people, the best course of action is to purchase shares in an S&P 500 ETF. Do this whenever you have some extra money that you can afford to put away for several years.
3. Think long-term
Your investment time horizon should be at least five years. Ten is better.
Resist the temptation to check the value of your holdings every day. You should also ignore the financial press and the noise from the media. Most of the “bad news” you hear will go away and have little negative impact on your investment.
4. Remain calm when the market falls
You can be sure that the stock market will experience several sharp declines and crashes in a ten or twenty-year period.
What should you do when this happens?
Nothing at all. Stay invested. Historically, every decline in the S&P 500 has been followed by an even bigger recovery.
5. Invest first, spend later
Many people complain that they have little money left over to invest after paying the month’s expenses.
There’s a simple solution to this problem.
Instead of investing the money you have leftover after paying all your bills, transfer a fixed amount to your S&P 500 index fund at the beginning of the month. Doing this will ensure that you invest regularly.
BONUS. Make a beginning as soon as possible
Don’t overthink the decision. Start immediately, even if that means investing a small amount. If you never start investing, then you will never see any profits.
Remember that Chinese proverb that says: The best time to plant a tree was 20 years ago. The second best time is now.
If you’re interested in winning money in the stock market,
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