Trading/investing and gambling are two pursuits that are often viewed as the same.
However, they share some key differences.
We’ll cover these in this article.
Trading and investing have positive expected value, gambling has negative expected value
When you trade or invest, you are looking for bets with positive expected value.
But with gambling, the house always wins – i.e., negative expected value.
When you trade or invest, you use your knowledge and understanding of the market to make decisions.
But with gambling, it’s all down to chance. You might get lucky and win, but in the long run, the house always wins.
This is why casinos can stay in business despite some gamblers winning big jackpots.
Trading and investing are done with a risk management plan, gambling is done without one
When you trade or invest, you have a plan for managing your risk. This may involve stop-losses, limit orders, and other strategies.
With gambling, there is no such thing as risk management. You’re simply placing a bet and hoping for the best.
If you lose, you lose your money. There’s no way to limit your losses.
Trading and investing are generally long-term endeavors, gambling is typically short-term
When you trade or invest, you’re usually in it for the long haul. You may hold positions for days, weeks, months, or even years.
Exceptions are things like daytrading, but most forms of daytrading are essentially gambling.
But with gambling, most people only gamble for a short period of time. They might place a few bets at a casino or racetrack, but they’re not in it for the long term.
This is one of the main reasons why casinos make more money than gamblers.
What’s the difference between investing and gambling?
The bottom line
Trading and investing are two completely different animals from gambling.
They may share some similarities, but the key differences are that trading/investing has positive expected value while gambling has negative expected value.
Trading and investing are based on analysis and understanding, while gambling is based purely on chance.
And finally, trading and investing are done with a risk management plan, while gambling is not.