Investing vs. Gambling: What’s the Difference?

Is investing the same thing as gambling? Not exactly. Learn how investing is different from taking your chances at an online casino.

To someone who is unfamiliar with the stock market and general investing, the act of investing your money in the market can certainly appear like gambling.

If what you know about the stock market mostly comes from some wild headlines and the talking heads on CNBC, then it makes sense that you’d think investing is akin to gambling — you hear a few stories here and there about someone hitting it big, but then you also hear stories about stock market crashes that ruined people’s lives.

So the ultimate question is this: Is investing gambling?

Legally speaking, investing is not viewed as the same as gambling. In the United States, the law doesn’t treat investing in stocks or futures as a game of chance; instead, investing is looked at as a skill-based practice because there’s the expectation that money managers have in-depth training that helps them understand the markets in order to make informed decisions.

That’s the short answer, anyway.

If we look at the question with a little more depth, we can see why some people might have the impression that investing is the same as gambling, but we’ll also see the more nuanced difference between investing and gambling.

The Basics of Investing

Investing is different from putting your money into a bank, where your deposits are guaranteed by federal deposit insurance. When you invest your money in securities like stocks or bonds, you give your money over to another entity with the expectation of a return on the money you’ve put in.

How Stocks Work

Stocks are an investment in a company, meaning that you own a share of that company. You don’t get to sit next to the C-suite bigwigs at the shareholder meetings, but you do get the right to vote during those meetings.

With stocks, you can get a return on your investment in two ways:

• The stock’s market price goes up. You can then sell your stocks for a profit.
• The stock pays dividends. These are payments made to shareholders from the company’s revenue, often paid out quarterly. (Keep in mind that not all stocks pay dividends.)

How Bonds Work

Bonds, meanwhile, are issued by companies, municipalities, states, and even federal governments as a sort of IOU between the lender and the borrower. People who own bonds are the creditors, or debtholders, for the issuer, who then gains funding to finance projects and operations. Bonds come with end dates, when that loan’s principal is due to be paid by the bond owner. When you purchase a bond, it comes with its own terms for fixed or variable interest payments.

Both governments and corporations will use bonds to borrow money. Governments may use them to fund infrastructure projects, while corporations may use them to buy property or equipment, perform research and development, or hire more employees.

Because large companies usually need way more money than a bank could provide, they allow individual investors to assume the role of the lender through bonds. But unlike with stocks, bonds don’t give you any ownership rights.

With bonds, you can get a return on your investment in two ways:

• You hold on to the bond. If you maintain ownership of a bond until its maturity date, you can collect interest payments on it, usually twice a year.
• Sell the bond. Many bonds can be publicly traded, so you can sell yours at a price that’s higher than your initial purchase price.

Why You Should Have a Mix of Stocks and Bonds

An important aspect of investing involves keeping what’s known as a diverse portfolio. This means that you don’t just dump all of your money into some stock you think will perform well. Instead, you invest in stocks and bonds across different companies within a wide array of industries.

Some stocks and bonds are going to be riskier than others, and you also need to take into account how risk-averse you are. Low risk tends to mean low expected returns, while higher risk can lead to higher returns (or not).

Thinking of investing in that new biotech company? Maybe you should only do it if you have a high risk tolerance, because when biotech stocks fall, they often lose 95% (or more!) of their value.

Meanwhile, if you don’t like to expose yourself to much risk, then something like a U.S. Treasury bond would be more up your alley. There’s next to no chance that an investor holding a Treasury bond won’t receive their stated interest and principal payments.

Investing Is Typically a Long Game

Investing means putting your money into the stock market with a “long view,” as Shark Tank investor Kevin O’Leary puts it. It includes sitting on stocks for a long time to see true growth from a company as it builds over the years. It can also mean using those stocks or bonds over the course of decades to contribute to a retirement plan, like a 401(k), 403(b), or an IRA.

Long-term investing includes a higher interest rate (maybe you’re looking at a 5.48% annual return) over a savings account (which might offer 2% interest if you’re lucky). This, paired with making regular transfers to your portfolio over a span of decades, means greater compounding of your money.

How Gambling Works

Gambling is inherently about chance and the risks therein — think of a game like roulette, where the outcome of any game is left purely to randomness.

The risk you take with gambling will very likely never pay off. Remember that when you’re gambling, the house almost always wins, and the longer you play the worse your odds become. There will always be a house edge built into the gaming system at any given casino, meaning that your chances of winning are never based purely on the number of pockets on a roulette wheel or the sheer amount of combinations on a slot machine.

Of course, you can try to look for your own edge when you gamble. Gamblers who focus their efforts on sports betting will research a team or player’s history, or get information on a horse’s bloodline and track record. When it comes to card games, poker players try to look for cues or tells from their fellow players at the casino, or blackjack players may count cards to keep track of what’s been played so far (card-counting isn’t illegal, but many casinos will try to discourage this).

Gambling Can Be a Short-Term or Long-Term Activity

Gambling isn’t automatically about chasing that one big win. It can be, but it can also involve years of research, planning, and careful budgeting.

How Investing and Gambling May Seem Similar…

The stock market works on the idea that people will invest if they’re compensated for taking the risk of buying any given stock. That concept of risk is why many people view investing as the same as gambling.

Instead of accruing interest in a typical banking account, the value of your stocks and bonds will fluctuate with market conditions. There is never any guarantee that you’ll make money from investments — in fact, they might actually lose their value.

In addition, you are effectively gambling when you invest if you’re risking a substantial loss while chasing a big payday in hopes of making huge, quick gains.

The Difference Between Investing and Gambling

But not all investments are speculative bets that require luck to make you more money. Investing typically means thinking of buying stocks and bonds with that “long view” suggested by O’Leary.

How people often lose their money when investing comes down to how emotional they are when they look at their portfolio. Market fluctuations happen, and if you panic when you see your stock drop and immediately sell, then you’ll most certainly lose money.

But if you check on your portfolio maybe twice a year and can hold on to stocks for more than 10 years, you’ll be rewarded with higher returns that offset any short-term risks. Typical investing removes the emotion and guesswork and instead relies on systematic, rules-based methods.

What About Day Trading and Stock Speculation?

Of course, not everyone likes to take the slow-and-steady approach when it comes to investing. This is where things like day trading come in.

Day trading is when you’re buying and selling securities within the same day, or even multiple times a day, over the internet. Day traders pay attention to factors like the news, economic statistics, and corporate earnings to judge how significantly the cost of any given stock will go up or down.

Stock market traders try very hard to distance themselves from being called gamblers, but it’s hard to ignore the similarities between trading — rather than investing for the long term — and gambling.

Trading within the market deals heavily in odds where things might be tilted in your favor but aren’t guaranteed. Amateurs can be lured in by the hope of high returns over a short period, and success stories of a few day traders who struck it rich can encourage excessive risk-taking in those who aren’t well-educated or well-funded.

If you’re not doing careful research and trying to thoroughly understand a given company’s financial situation as well as its strengths and weaknesses, you’re pretty much rolling the dice every time you trade.

Robinhood and Gambling Behavior

Robinhood and similar mobile investing apps are online brokers that target day traders. They make it possible for just about anyone with some extra money to buy and sell stocks on their own. And of course, the old guard of the investment world are none too happy to see apps like this proliferate.

Warren Buffet, chief executive officer of multinational conglomerate holding company Berkshire Hathaway, compared the new crop of day traders to gamblers and even said that Robinhood perhaps has even “set out to attract” a large swath of people who are simply gambling on short-term price movements in the market.

Shark Tank investor Kevin O’Leary has also weighed in on the topic, saying that “day trading is not investing. Day trading is gambling.”

Of course, execs at Robinhood have defended themselves, saying that fintech apps like theirs are changing the status quo and making the concept of investing more accessible and less intimidating to those who never would have thought to invest in the stock market before.

Beyond the criticism from people like Buffet and O’Leary, there are the concerns of those who work with gambling addicts. Executive director of the National Council on Problem Gambling Keith Whyte said that “the online day trader with problems is indistinguishable from the online gambling addict.”

Robinhood is famous for its green confetti that cascades across your phone’s screen when you make a trade. “A lot of this is directly taken from the user experience of casinos: It encourages immediacy and frequent engagement,” says Whyte.

He refers to app features like the confetti, icons for “free stocks” that look a lot like lottery tickets, and perks for users who tap inside the app more frequently. All of these combine to encourage frequent engagement and a sense of immediacy, which triggers the body’s dopamine response and keeps users coming back for more.

Instead of encouraging regular contributions to index funds and other long-view investing methods, Robinhood praises the user and gives them a dopamine hit after a trade, which critics say ends up monetizing gambling impulses. The fun elements of an app like this can quickly lead an inexperienced trader into riskier behavior.

Important Takeaways

Just like if you’re unfamiliar with the risks involved in online gambling, you may fall prey to similar risks with online investing.

The major impression seems to be that you should always be careful with your money, like setting aside a clear gambling or day trading budget and doing what you can to assess your risk. With an online casino, that includes steps like researching your house edge or the RTP on a slot machine.

With online investing, that can include researching the backgrounds and future outlooks for particular companies. You should also consider following the 1-Percent Rule, in which you never risk more than 1% of your account value on any given trade.

In the end, you should look at investing as a slow process for building wealth over the course of your lifetime. It’s not about hot stock tips and fast trades — it’s really about starting early and participating in the markets consistently.