It is not new to hear about the comparison between gambling and investing. Most people, who are not too aware of stock markets, still like to believe that both these terms mean the same. However, there is only a small similarity between the two. Winning in a betting or gambling game is purely dependent on luck; however making good returns from stock market investments doesn’t work that way. It is a more structured way of putting your money in, where you make calculated moves and follow patterns while taking manageable risks. Let us now try to understand the relation between these two terms.
Will your gambling skills make you a prudent investor?
The answer to the above question is a straightforward “No”. While both gambling and investing in stock market involve taking a good amount of risk, the relation stops there. You need not necessarily make handsome returns from the stock market, just because luck favoured you at a casino, betting game or gamble. To get good returns from the market, you should stay invested for long periods of time and safeguard yourself from frequent trading initially. On the contrary, gambling is a concept where your emotions are at stake and you place bets on short-term happenings and you have the risk of losing your entire capital here, in one go.
Similarities between gambling and trading in a stock market
There are few similarities between gambling and investing in capital markets.
a) knowing that there is a risk of losing a whole or part of one’s capital and b) the willingness to take that risk c) both can be addictive
You usually place a bet based on the total money placed in the betting pool and you decide the bet based on the favour-ability of the odds. Similarly, in the case of investing, you will first arrive at the figure that you can afford to invest and then decide the percentage of risk that you can take on your capital. If there is one area where gambling skills might come in handy for you while investing in a stock market, it is in giving you the mental capacity to take risks. The similarity ends here.
Differences between gambling and trading
There are quite a few of them; however the major ones are briefly mentioned here. For starters, let us look at the risk factor. In a gambling game, you either win handsomely or you lose terribly. There is no way you can distribute or reduce your risks here. However, in a stock market, if you find your stock price dropping, you can sell it off early and safeguard yourself from further losses. Also, gambling is just a blind game of luck and betting whereas stock market investing is a far more professional, structured and calculated approach, which has a science behind it.
This takes us back to our first question – will gambling help improve investment skills? Careful analysis of stock market patterns alone can improve your investment skills. Nothing else can even come close!