When you invest, are you leaving your wealth to chance? Let’s take a closer look at investing, gambling and speculation to understand the fundamental differences between the three. And the common thread that ties them together.
To an outsider, the stock market may look a lot like gambling. In fact, that view may be the default for anyone who grew up without friends or family in finance.
There’s a good reason for it: Hollywood has had lots of fun telling stories about the dramatic, high risk/high reward end of investing, and that’s had a much bigger audience than featuring investors seeking modest incremental returns.
The reality is that gambling, speculation and investing all share one thing in common: the notion of risk.
Each option is separated by subtle differences that aren’t black and white, and instead, exist on a continuum. This means that there truly are investment options for every personality type, and appetite for risk. Let’s break down each type with an example:
Gambling
Whether you’re playing roulette or tossing a coin, both end in a 100% random outcome. If you play once or ten times, any knowledge you bring to the game won’t ever influence the result.
Investing is at the other end of the spectrum
The example of investing in a residential property shows us how knowledge can influence an investment’s outcome.
If you thoroughly research a town or city – its population growth, local industries and upcoming opportunities – you can eventually conclude whether or not a residential property is likely to deliver rent payments and, potentially, property appreciation.
Speculation sits somewhere in the middle
You may find yourself confident that a change is on its way – maybe it’s a biotech start-up that will transform public health, or a junior mining company likely to strike gold in the Australian Outback.
Speculation means taking a leap with your money on some of these educated guesses… with both higher risks and high potential returns.
The more you learn about investing and risk, the more you see risk as a truly integral part of life.
In summary
- Gambling is putting your money on an entirely uncertain set of outcomes, with the hope of winning more.
- Investing is purchasing an asset to either receive an income (like dividends or rent) or benefit from its future appreciation. It could also be a combination of both.
- Speculation is taking a calculated risk on an assumption: exposing yourself to the chance of losing it all or making a large return.
But, even equipped with these three distinctions, it’s important to know they aren’t separated by clear borders. It’s more helpful to see them on a spectrum.
A final note
Even if we choose to entirely avoid gambling, investing or speculation, we will never be free from the force of risk. Even the cash in our bank accounts is exposed to inflation, currency fluctuation and economic downswings.
Indeed, the more you learn about investing and risk, the more you see risk as a truly integral part of life. No matter what we do, we’ll always face a certain level of risk and uncertainty.
If you aren’t already investing, it should now be clear that you’ve got opportunities at your fingertips — both high and low risk in nature.
If you’d like to continue growing your investing confidence, our free Kickstarter Guide is ready to teach you the fundamental principles at your own pace.
