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Investment and gambling are at times by some people considered similar to each other, while some people maintain that these are two completely different activities. In this article therefore we shall try to look at these two activities in order to understand how similar or different they are from each other.
What is investment?
Investment refers to the act of investing money, time and resources into any investment option that the investor expects to generate a return from. Investment may sound simple but it has got complex strategies and theories that the investors need to be aware of. One cannot simply take their money or savings and then invest them. No, investment has to be done in a systematic manner in order to be fruitful.
Risk – Reward relationship
The very first thing that investors need to be aware of is risk. Risk is a vital part of investment and it is coupled with reward. The risk – reward relationship is something that both individual and corporate investment rests upon. Before any investment is made, investors look at the risk – reward relationship to ascertain if the investment is going to be worth the risk or not.
The more risky an investment is the higher its reward will be because if an investor is going to invest in a risky investment that has a high chance of loss then that investor will ask for a higher rate of return to compensate for the high risk. This is why junk bonds carry a high rate of return whereas treasury bonds carry the lowest possible rate of return.
Interest rate is also referred to as the rate of return by investors because it signifies the return that the investors generate over their spending. If we look at this interest rate or the rate of return then we will see that the risk is embedded within the interest rate, this is why more risky investments carry a higher rate and less risky investments carry a lower rate.
Risk Appetite
Once the investors have understood the risk – reward relationship they need to determine their own risk appetite before investing their funds. Risk appetite refers to the ability or willingness of the investor to take risk. There are two main types of risk appetite
- Risk averse
- Risk seeker
Risk averse investors are more prudent and therefore they do not take a lot of risk. They follow a minimum risk strategy in order to protect their investment. Whereas risk seeking investors are more open to risk and therefore if you look at the portfolios of risk seeking investors you will find investments that are more risky in nature but at the same time you will also find that risk seeking investors earn a greater rate of return.
Risk appetite therefore is something that investors need to know before they invest, as it will determine how their portfolio is structured. Risk averse investors are usually those who aim for long term wealth generation instead of taking advantage of short term day to day price fluctuation, this is a low risk strategy that carries low reward in the short term and focuses on wealth generation and exponential returns in the long run whereas risk seeking investors usually look to make profit through the short term price fluctuations and have a traders mindset, that’s closer to their investment strategy.
Market Awareness & Time Duration
Investment therefore isn’t something that can be done off the cuff. Once the investors have figured out their risk reward relationship and their risk appetite they will then need to gain the understanding of the market and investment assets that they wish to invest into. Every investment asset has a different set of fundamentals and underlying realities that the investors need to be aware of.
Gold for example is considered by many investors as a safe haven asset but if an investor converts 100% of their portfolio into gold then that won`t be very productive because gold doesn`t carry a periodic rate of return. Gold can for instance save the erosion of wealth and result in capital appreciation but unlike stocks and bonds, gold doesn`t carry any dividend or interest and therefore converting 100% portfolio into gold is not such a great idea. This is why investors need to have detailed information about different investment assets so that they can take informed decisions. Alternatively investors can use the services of an investment advisor to help them make investment decisions.
What is Gambling?
The term gambling brings to mind the image of a casino or Sbobet, laid out with black jack tables, roulette and bright flashing lights where people go to have fun and try their luck. Gambling can be defined as putting stakes on a contingent event where the reward will only be guaranteed upon the happening or non happening of a contingent event. In simple words gambling can be defined as betting or wagering your money on an uncertain event or outcome. That event may happen or it may not happen, this means that a great degree of chance or probability is involved when it comes to gambling.
However, gambling isn`t just about chance, probability and perhaps luck. No! From the surface it may appear as luck and chance but if we prod the surface a little, then we can see that gambling also has a systematic manner to it.
People who gamble don’t really go all in, do they? Gamblers just like investors carefully assess how much they are willing to put on the line and they have a similar process of determining the risk. While investors have mathematical and statistical ways to determine the risk inherent in an investment, gamblers have their own way of determining the risk. They make use of odds to ascertain their likelihood of winning and then put their funds on stake accordingly.
Just like there are many different investment options similarly there are a lot of different ways to gamble. Horse races, lottery, casino games, betting on events and their outcomes etc. Just like there are amateur and professional investors in a similar manner there are amateur and professional gamblers. While amateur gamblers may not understand the system, professional gamblers understand how the system works and therefore they know their limits and back out of the game just when they feel it right because as far as gambling is concerned the longer one stays invested in the gambling activity the more at disadvantage that person will be.
Although gambling can be done in a systematic manner but in the end the mathematical odds will start stacking up against the gambler, which is something that doesn’t really happen in investment as long as the investor keeps on taking informed decisions.
Are investment and gambling alike?
The lines that separate the two activities are very distinct and clear in certain places but they are also blurred in certain places. Therefore it is going to be difficult to say with certainty whether investing and gambling are alike or not.
The time factor is different for both. Investment can be done over both long and short term time periods whereas gambling is done in the short term. One can however say that day trading and gambling are perhaps alike because both are short term, however even then there are many differences.
Capital and risk however seem to be similar for both investors and gamblers alike. Investors carefully assess how much capital they can invest and the risk that they can expose their investment too, as we discussed above. Gamblers similarly do not go all guns blazing into their gambles. They carefully assess how much they can put on stake as well and risk assessment similarly is a major part of gambling.
This however is a discussion for another time. In this article we tried to have an overview of investing and gambling and after having gone through this article, it can be said that in certain aspects both activities overlap each other but in some aspects they completely differ from each other.
