Is investing the same as gambling?

You may have heard people grumble that investing is gambling, and find yourself wondering if building a portfolio is just the same as placing a bet.

After all, you put money in, face the risk of losing it and might be rewarded with a tidy profit. Put it like that and it can seem like those naysayers have a point.

But are they really the same thing, and are you just as likely to profit from a night at the casino as you are from a carefully constructed portfolio? 

To put it bluntly: Is investing gambling?

The difference between investing and gambling

You are in a casino, standing at the roulette table. As the croupier spins the wheel and the ball bounces and tumbles around, you slide your chips across the felt and put them on red.

You are logged into an investment platform app on your smartphone. After browsing assets, you select a stock and click to invest now. 

What separates these two activities?

In the casino scenario, you are betting your money on a snap outcome. Your decision might be based on vibes, superstition, or what has been happening prior, but it is not based on anything factual. 

And if the ball doesn’t land on red, you lose your entire wager. 

In the investment scenario, you are purchasing an asset, which you can generally choose to hold, sell, or alter your stake over years or even decades. While you might have picked the asset for no reason, there are also extensive resources available to help you make an informed decision, such as company announcements and earnings.

If the asset’s price does not grow as you had hoped, you might make a smaller-than-expected gain, a loss, or lose everything if it was a particularly bad investment. 

Perhaps the most crucial difference, and one which is not shown in these scenarios, is that in gambling, the odds are weighted in favour of the house. 

When it comes to investing, short-term market moves are unpredictable, but diversified long-term investing has historically good odds of a positive outcome. The S&P 500 price graph below is an illustration of this. Prices rise and fall across short periods, but over the decades there is a clear upward trajectory.

It’s important to note that not every stock market index performs like this, that losses are possible and that past performance is not a reliable indicator of future returns.

Investing vs gambling

So, if it had to be crystallised, what are the simple differences between investing and gambling?

Gambling is…

Risks and rewards of investing

While investing is not the same as gambling, one thing the two activities have in common is risk and reward. In investing, risk and reward often go hand-in-hand. 

Higher-risk investments may have higher potential rewards. As an example, let’s consider penny stocks. These are often small early-stage businesses. Some might have significant room to grow and deliver major share price returns to early investors. 

But they also carry significant risk. Their share prices can be volatile, and small companies can be wiped out more easily than industry heavyweights. They may also suffer from low liquidity, with fewer investors keen to invest in lesser-known entities. 

They could even have such a low price because they are simply poorly run businesses with little chance of success. 

On the other hand, lower-risk investments tend to offer lower returns. Let’s look at gilts, for example. Gilts are UK government bonds, which means they represent a loan to the UK government. 

The chances of the government failing to repay this loan are very low. In fact, it has not defaulted on interest or principal payments since the gilt market’s inception in 1694.

The trade-off of this is that the potential reward can be substantially lower than a higher-risk investment. 

Below is a rough guide to the general risk and reward potential of some common asset types.

High-risk investing

Some investing strategies are very high risk, and might strip away some of the structural advantages of investing. 

• Concentrated investing: If all of your money goes into one stock, even a large-cap stock with a solid reputation, you are putting all your eggs in one basket.
• Memestocks or memecoins: These are often driven by vibes, speculation, and popular movements. This means they can be extremely volatile and are rarely based on solid fundamentals or realistic growth prospects.
• Options trading: Options are essentially contracts giving the owner the option to buy an asset at a particular price. While they can be used as a hedge against risk, some investors use them as a tool for speculation.
• Day trading: This is where an investor seeks to make short-term profits by adopting and selling positions within the same day. It is a highly speculative way to invest, and involves far greater risk than building a portfolio for the long term. Focusing on same-day investing removes the long-term aspect of investing, which can help investors navigate periods of market volatility. 

Remember: Just because you CAN engage in high-risk investing, does not mean all investing is high-risk, or akin to gambling. Building a balanced portfolio based on long-term aims is a far more sensible alternative.

Is the stock market safe?

Just because investing is not the same as gambling doesn’t mean the stock market is ‘safe’. There is always some degree of risk, but you can control the level of risk with how you choose to invest. 

If you want to invest in stocks and minimise risk, make sure you do adequate research, have a sensible plan, and build a diversified portfolio.

Remember too that not all investing is done via the stock market. If you think stocks are too risky or complicated for you, you can build a portfolio from other assets, like funds. 

Some investments include information about the level of risk involved. For example, a fund’s Key Information Document will explain how the fund is invested and the level of risk involved. This will be expressed simply, using a numbered scale from 1-7 as seen below.

Piling the whole weight of your portfolio into the latest meme stock is a far cry from investing in a diversified portfolio of assets. 

Are investment platforms safe?

You might also be asking if investment platforms are safe to use for investing. Freetrade is an award-winning platform with over 1.6 million users, and is part of the FTSE 100 fintech company, IG Group. 

There are additional features that ensure the safety and security of Freetrade customers. Visit Freetrade’s keeping you safe hub to find out how your money, account information, and portfolio are kept secure.  

Remember: While a platform may be secure and regulated, that does not stop your investments from incurring market losses.

How to avoid investing like a gambler

If you are convinced investing is the same as gambling, maybe that’s because you are investing like a gambler. Perhaps that’s because you’re not really sure how to pick investments or diversify a portfolio. If that’s the case, why not consider investing like an investor instead?

Fortunately, there are resources to help you on your way to grasping the basics. These guides can be a good place to start:

• The best investments for beginners
• Learn the basics of buying shares
• Find out the best way to invest £1,000
• A guide to mutual funds

Of course, if you still find investing baffling, or you don’t feel like you have the time to learn more, you can still get involved sensibly. For example, why not let someone else think for you by using ready-made portfolios. These do the diversification for you and are built to suit different risk tolerances. 

Just make sure to invest in assets you understand, which are suitable for your risk appetite and investment goals. And don’t use money that you cannot afford to lose.

How to get help with gambling addiction

If you are struggling with a gambling addiction, either through your investment behaviour or some other means, there are places you can turn for support.

• GamCare offers numerous support channels, including a 24/7 helpline at 08088020133. 
• Gamble Aware can help you to find local support groups. Their website also features tools and content for those struggling with gambling, as well as concerned friends and family.
• The NHS offers treatment options if gambling is impacting your mental health, and also lists more charities and support services you might find helpful.

Consider exploring these options if you find yourself spending more than you want on gambling or investing, taking out loans to cover losses, lying to loved ones about your spending, or engaging in other problematic behaviour.

You can also reach out directly to Freetrade via in-app chat or email if you are having difficulty with your relationship with money.