What Are The Differences Between Gambling, Speculating, & Investing?

People often say that investing in the stock market is gambling, but those same people probably believe that when they’re gambling, they’re actually doing some sort of investing. It’s true – you can gamble, speculate, or invest in the stock market. When you go to a casino, however, you can only gamble. At a casino, the odds are against you. If you “invest” with no appreciation or understanding of what you’re investing in, then you’re probably gambling; at best, you’re speculating.

The differences between investing, speculating, and gambling can be easily understood if you know their probability definitions. When you invest (in every sense of the word), the odds are in your favor. Sure, things could go wrong in the interim, but if you invested for the rest of your life – you would find that you make money and not lose it. The stock market has returned about 9% every year on average since its inception. Based on this, it seems odd that people are losing money. It has to do with those ups and downs or deviations and people selling in panic; buying in mania; and not knowing what they’re investing in. There’s no denying the market’s returns over time. It’s people getting caught up in periods of bull and bear markets, and mistaking speculating and gambling for investing that decreases their returns or leads to losses over time.

Speculating, on the other hand, is a 50/50 situation. This would be like you betting with your friend if a coin was going to come up heads or tails. You get $1 if you win; you pay $1 if you lose. If you played this game a couple of times every day for the rest of your life, you would essentially break even. Sure, the coin might come up heads 10 times in a row, but it doesn’t change the probability of the next flip. The coin could similarly come up tails 10 times in a row on the next 10 flips. The coin doesn’t know that it came up heads or tails 10 times in a row. (Believing that the coin is more likely to come up tails if it comes up heads a lot is the gambler’s fallacy.) When you add everything up at the end of all those games, you would essentially make or lose little money. Maybe you’re plus or minus $10, but you would have speculated with thousands of dollars over that time frame for essentially zero return, a reflection of the 50/50 odds with each bet. The stock market parallel would be betting which direction the market was going to go on any given day. No one really knows. Avoid people that tell you they do.