Is Investing Like Gambling?
While investing involves a level of risk, it is not gambling. The type of investing strategies you adopt, i.e. speculating (short-term trading) or long-term investing, can greatly influence the risk level and return that you achieve.
What’s the Difference?
Speculating: buying and selling stocks for short-term profit, with a focus on short-term share price movements.
Short-term traders buy and sell stocks within weeks, days and even minutes with the aim of short-term profits. They often focus on a stock’s technical factors rather than a company’s long-term prospects. Short-term traders are concerned about which direction the stock will move next and how they can profit from that stock’s movement.
Investing: Investing is about buying stocks for long-term gains based on their fundamentals. Long-term investors buy and hold a stock for years and often hold stocks through the market’s ups and downs.
Short-term Traders vs Investors
Timing is the chief difference between speculators and investors, but their focus also differs significantly.
Investors will study a company’s potential for long-term growth or value, but speculators often take advantage of small price movements in the market, such as when political uncertainty in a foreign country temporarily pushes down the share price of a company.
These ‘scalp traders’ might be in a position for just a few minutes before selling, ‘day traders’ focus on the trading day and ‘swing traders’ invest for days or weeks.
Which is Best?
That depends upon your investing strategy and your goals, but it is generally considered that speculating is much more risky and incurs much greater fees. Even highly experienced traders lose money when speculating on ups and downs in the market.
There are many factors that could affect the outcome of a trade; e.g. an unexpected piece of good or bad news or something happening in the wider market may effects the share price of the stock. Trying to second-guess what the market will do next has blindsided many experienced investors over the decades. Having said that many short-term traders, experienced or novice, have and do make money and sometimes, if the trade hits a sweet spot, very much money indeed. Bear in mind that each trade will incur a transaction fee which, if you are trading regularly, will eat into any profits you make. Overall, speculating is much more akin to gambling than well-researched long-term investing.
Long-term investors will generally undertake detailed research into a company e.g. its fundamentals, its management team, financial situation, levels of debt, future plans. They will read available company reports and investigate the market conditions for the sector in which the company operates to make an informed decision. They often hold onto a stock for years or even decades, holding firm and not selling when the market suffers setbacks, because they are not in it for the short-term and are waiting for their investment to mature. If they plan to hold for years, it doesn’t matter if the stock price falls in the short term, indeed this can be an opportunity to purchase more of the stock at a better value. Longer term investing is by no means guaranteed not lose money, but this approach can help weigh the odds in their favour and can accrue wealth in the long-term.
It is generally considered a rule of thumb that investing is a longer-term approach and considered a lesser risky to manage your wealth than speculating. Many people see trading portrayed in movies and think that it will be an easy way to quick riches and for a few that can be so, but most traders lose money this way. The smart way to approach investing is not to invest more money than you can afford to lose and think about investing as a long term approach to managing your wealth with a range of assets in a diversified portfolio to spread risk. Buyer beware and learn the difference between investing and speculating!
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