Investing vs Gambling: What Is The Difference?

The Reddit-fueled stock market rallies in 2020 bring an important question back to the table. On the surface, investing in the stock market can feel a lot like gambling. You risk some capital and hope for more in return.

However, there are some key differences between investing vs gambling.

It certainly can feel like sitting in a casino when the market is red, and it’s tempting to throw a few dollars on a stock garnering a lot of attention.

Some argue that while investing is generally a long-term approach to gain market exposure, day trading is very similar to gambling. Day trading is a common practice, and it’s done on any size company or investment. There are people who day trade everything from commodities to stocks, options, crypto, and more.

But long-term investors like Warren Buffett and Cathie Wood (who founded the ARK Invest ETFs) take a different approach. So do the funds holding your IRA, 401k, and other retirement accounts. That’s what you want them to do.

Let’s dive into the intricacies and idiosyncrasies that separate investing from gambling.

Is Investing the Same as Gambling?

Investing isn’t gambling, but it does share similarities. For example, you don’t know what’s going to happen tomorrow or next year that could affect a company or commodity’s price. The pandemic is an example of a black swan event that affected the markets in unpredictable ways.

Investing is a much different endeavor than throwing a bet on the Super Bowl, joining an NCAA pool, or sitting down at a poker table.

Businesses are legal entities, and the executive teams of the companies are listed publicly; it’s true also even for many private companies. That’s because the owners are at least partially responsible (financially, legally, and more) for the operations of the business.

While paying $100 for shares of a stock on Robinhood may not feel the same as Marcus Lemonis taking over a company on The Profit, it is on a high level.

You do get a say in how the business runs as a shareholder. Those votes can determine company-changing events, like whether a merger or acquisition is approved. Shareholders can even join the Board of Directors, and these rights aren’t afforded to gamblers.

In fact, let’s dive into the difference between gambling and investing in the casino.

How is Investing Different from Gambling?

The best way to differentiate investing from gambling is to illustrate it. For example, the over $50 billion gambling market is dwarfed by the over $15 trillion New York Stock Exchange. To further break it down, we’ll need to explore some gambling companies you can invest in.

Las Vegas Sands Corp. (NYSE:LVS) is one of many companies with a presence on the Las Vegas Strip, along with other popular gambling hot spots around the world. It operates casinos and resorts, along with online gambling in a variety of locations.

The company’s $3.61 billion in revenue is over $10 billion less than the prior year because of the pandemic. But the move to online gaming and a potential recovery give investors hope for the future return of the company’s dividend payouts.

Churchill Downs, Inc. (NASDAQ:CHDN) is the owner and operator of the namesake Kentucky Derby racetrack, along with horse racing tracks around the country.

It generated $1.054 billion in revenue in 2020, caused by the lack of a Derby at the onset of the pandemic. But it came back with a September Derby for 2020 and a May 2021 race.

Draftkings Inc (NASDAQ:DKNG) fourth quarter 2020 revenue of $322 million is nearly 150 percent higher than the previous year.

And the reason these companies earn so much money is because of gamblers.

Gambling is one of the hardest ways to make a living full-time, and even though about 85 percent of adults in the U.S. have gambled, few make money. The Wall Street Journal found about 95 percent of people who gamble lose their initial money.

This money is what fuels the gambling industry. All these companies make major money from crowds of people coming to lose their money.

On the other hand, the average return of the U.S. stock market over any 20-year period in history is a 6-percent gain. Of course, there are exceptions to every rule, and there are some investments that come closer to gambling than others.

One is penny stocks.

Is Penny Stock Trading Gambling?

The surface-level difference between a penny stock and regular stock is the price, but the price of a stock is determined by more than chance.

Seasoned investors often tout the fundamentals of investing, which involves performing due diligence on a company’s revenue streams, profitability, debt load, and obligations.

A public company like Draftkings or Sands files regular quarterly and annual earnings reports for investors, in accordance with SEC guidelines.

The SEC works with major exchanges like NASDAQ and the NYSE to ensure transparency among publicly listed companies.

But penny stocks aren’t publicly listed on these exchanges. They’re traded on the over-the-counter (OTC) markets. These companies have smaller market capitalizations or operate in businesses with complicated legal matters.

Companies operating in the American cannabis industry, for example, largely trade as penny stocks. They’re allowed to exist because of state laws, but federal drug laws prohibit these companies from listing on a public stock exchange.

Penny stocks can often be investments in companies that won’t beat that 20-year market return. You could lose your money if they go out of business, and you’ll have trouble finding public information on the company’s financials.

However, penny stocks are popular among day traders, as are options.

Is Options Trading the Same as Gambling?

Options trading can be speculative akin to gambling, though a wide range of strategies. exist – some of which can be conservative, like covered calls.

With options contracts, you purchase the option of buying or selling a stock at a specific price within a specific timeframe. These contracts represent 100 shares, and they can be bought for much cheaper than the price of buying 100 shares.

Although you’re amplifying your risk exposure with options, it’s not gambling. You’re simply leveraging money to invest in the company, but the losses can be great if you trade incorrectly in the short term.

That’s why it’s best to invest for the long term.

Why Invest for the Long Term?

The most important lesson you’ll learn about investing is that time in the market always beats timing the market. Day traders try to time the market to earn a profit based on the daily movements in any particular investment.

No matter how great the company you’re invested in is, it will inevitably have ups and downs on any given day. You can make a quick profit (or loss) by trying to time these using candlesticks on technical graphs tracking the stock’s movement.

But there is no holy grail. Instead of trying to time the market to make quick profits, do your research, follow the fundamentals, and invest for 10- and 20-year periods. This is the historically proven way to make a profit.

Why Day Trading Is Like Gambling

Day trading is an aspect of investing that’s like gambling. Instead of focusing on the fundamentals of the company, you’re watching its daily movement and betting on it going up or down. This can cause a cycle where people are pouring good money after bad money, which we saw in multiple stocks in 2021 alone.

It can work out for you, but the odds are greater in favor of the house. Instead of gambling, invest in gambling companies and trust them to preserve and even grow your wealth.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.