Investing vs Gambling – Two Sides Of The Same Chip?

Is
trading with stocks and shares a form of gambling? It’s a question that stirs
up plenty of heated debate.

The former is often seen as a legitimate career path, a serious pursuit for intelligent individuals dressed in sharp suits, and a smart way to use and move around capital – risking money to make money, deciding which businesses and markets to back.

We’ve
all watched those Hollywood movies set on Wall Street, where characters push
the stock market rules to the limit, riding their luck or skill and reaping the
benefits of a high-pressure, big pay-off lifestyle.

It
can look suspiciously like those films that glamourize casinos.

But
at the opposite end of the spectrum, gambling can also sometimes draw the wrong
headlines, and be labelled as a vice or addictive pastime.

Yet
when it comes to the crunch, are trading and gambling just two sides of the
same coin?

With the GameStop saga having been in the news recently, showing how quickly stocks and shares can turn into a ‘gamble’, we thought we’d delve a little bit deeper into the debate…

Stocks
On The Rise

The Financial Times recently reported on rising numbers of young people and novice investors being drawn to the thrill of investment in stocks and shares.

A combination of COVID-19 lockdowns leading to more unspent money, furloughed folks at home with time on their hands, and global market lows, were blamed for the sudden boost. The report also indicated that tech stocks in the likes of Amazon and Apple were popular among millennials with money.

Trading apps like Robinhood have also seen a surge in interest.

The commission-free trading platform in question has seen its number of users spike across the past seven years – from 500,000 in 2014 to 13 million in 2020, the year of the pandemic, according to Statista.

Graph showing number of users of Robinhood
Image: Statista

Suddenly, investing in stocks and shares seems ‘sexy’.

At
the moment, more and more people are trading, and the potential reasons for
this – to try and double your money, to strike it rich, for the thrill of the
chase, the highs and the lows – do sound strikingly familiar…

Robinhood
Slams On The Brakes

The
Robinhood platform also takes us neatly onto our next point – the GameStop saga
that’s still rumbling on.

If
you’ve been living under a stone for the past few months, which is entirely
plausible considering the current pandemic, the Robinhood app – which is said
to appeal to younger and less wealthy investors – is described as being a ‘key
player’ in the controversy.

In January, the video game retailer GameStop saw its stocks shoot up, doubling in value daily.

Rise and fall of GameStop stock
Image: Statista

This
was due to a social and online media campaign aimed at raising the company’s
value and hiking the share prices, thereby hampering professional investors who
were planning to ‘short sell’ shares – borrowing shares before selling them and
purchasing them back at a lower price to make a profit.

For
its part, Robinhood and other platforms capped or restricted trading of
GameStop stocks for a couple of days during this time. Its users were unhappy,
to say the least, claiming it was a form of market manipulation to help out the
hedge fund managers.

So
much for ‘stealing from the rich to give to the poor’…

It’s
estimated professional investors did lose around $20 billion USD in the first
month of the year, but when the borrowed shares were returned, prices
reportedly plummeted as the demand for the stocks fell once again.

For
the benefit of our debate, this is an illustration of how easily hype and
excitement can lead to people jumping on prices in the rush to reap instant
rewards, turning volatile and complex situations into a gamble if investors don’t
understand when they need to pull the plug.

You
could say, it’s a perfect example of how, even when you think you’ve turned the
tables, the house always wins…somehow.

Is
Trading The Same As Gambling?

Stocks chart with playing cards in front of it
Image: Shutterstock

So
is trading just a poorly disguised, high-brow form of gambling? Here’s the
argument for…

Hedge
fund managers may not like it, but trading and gambling do have plenty of
things in common. And once you’ve realized that, it can be hard to overlook.

For
starters, you’re dealing with odds and risking your own money to try and make
more, with the risk of losing it all. What says ‘gambling’ more than that?

Strategy
– following the performance of others, analyzing the current situation and behaviors,
using the experience of previous scenarios – to determine how you’ll move your
money, is also a key feature of both.

And
similarly, the risk level rises with the level of investment, just as it does
at the games tables.

At
the casino, if you’re sure of the hand you’re playing with, that the game is
looking favorable and there’s huge winnings up for grabs, you may back yourself
and bet as much as you can afford to lose.

But
if you pile all your chips down on a game that could turn at any second, you
know you’re putting your savings on the line and could go home with nothing.

It’s
exactly the same principle with the stock market; is the business you want to
back worth what you’re risking?

Those
are the decisions traders have to make every day – determining, just like a
gambler, whether to go all in or say they’re all out.

The
highs – when you make the right call that sees the value of your assets soar –
can be followed by quickly losing it all and having to start rebuilding your
portfolio from scratch.

If you’re a risk taker, there seems very little difference between backing a company on the international market and playing a game on blackjack or high-stakes poker at a local or online casino.

Uncertain
outcomes and chance are at play in either scenario.

You could argue it’s all a game, and if you’re investing, one where bluffing can have far wider-reaching impacts.

Can
Day Trading Be An Addiction?

Within the similarities is also a more concerning sub-section – the potential for addiction.

As
with anything that involves ‘winning’ and can make you feel good, the thrill of
day trading, of seeing investments pay off, can be an addictive element for
some people.

The
addictive issues surrounding gambling – the chance of making a large profit, the
fast pace of games, combinations of highs and lows, taking risks to regain that
good buzz from successes, can also be present in the trading of stocks and
shares.

While
being engrossed in a game or market can seem harmless, it’s been well-covered
by numerous studies that any kind of addiction has the potential for ‘players’ to
spiral, lose their focus on everyday life and risk financial ruin.

How
Trading Is Different To Gambling

Stocks chart
Image: Shutterstock

But
what about the argument against?

We
can also see, of course, that there are differences between trading and
gambling.

When
you bet on a game or an event, it’s short-term and instant with perhaps a poker
tournament stretching over several nights or a week at most. Whereas investing,
and portfolios, can be a life-long pursuit.

Some
argue that this difference in timescale also helps differentiate trading and
gambling even further – with the odds for gamblers increasingly in favor of the
house, the more and longer that they bet.

The ‘house’ – the casino or the games company – does in theory have a mathematical edge the longer that betting goes on.

But
for stocks and shares, the common perception is that your chance of making
money increases over time and pays off. Yet all this does, again, depend on the
type of trader or gambler you are.

Other
arguments include that when investing, you actually own a share in a company,
which provides value either way. Compared to gambling, which gives nothing
tangible in return unless you win.

The
flip side of this, is that of course those stocks and shares could end up being
worthless.

But
isn’t it true that you can then sell any shares that drop? Yep, of course.

With
trading there’s always the option to back out and still get some value back –
to foresee a loss coming your way and mitigate against it.

The
same cannot always be said for gambling – once you’ve placed your bet, your
money is on the line.

Yet now, at some sportsbooks for example, you can back out of bets on sporting events early if you’re winning but sense a change in the direction of the game, and then get your stake back plus some.

Rolling
The Dice

Dice on stocks and shares sheet
Image: Shutterstock

In
the end, having covered both the similarities and the differences between
investing in stocks and shares and gambling, it all looks like a case of
preference.

Either
way, you’re risking something. And risk, we’d argue, or calculated risk, is the
crucial element that defines gambling.

Gambling
is, in essence, betting on something – whether that’s an event, game, market
change or a company – staking money or something of value on a potential future
outcome, an outcome that’s uncertain.

And
of course, it’s key to remember that in both there are truly only two outcomes
eventually, be that after a day at a casino or years of investing on the
markets – and those are a profit or a loss.

Whether
you do that in an online game, in a sportsbook, at a games table in a casino,
or on a platform dedicated to stocks and shares, it all sounds like placing a
wager to us.

Latest posts