The lines between investing, speculating and gambling can sometimes be hard to distinguish. After all, on the surface they all appear to involve taking a chance with money, hoping that it will result in more money later. Yet there are important differences to grasp, particularly if you are discouraged from investing if you equate it to speculation or gambling. In this guide, our financial planning team shows how these concepts differ – and why we only recommend investing.
Ownership and value
When you invest into something, you typically take ownership of it on some level. For instance, buying shares in a company – e.g. 20% of them – means that you now own 20% of the business. Investing involves growing your ownership of assets i.e. resources or entities which could, if needed or desired, be converted into cash.
This is a key difference to gambling and many types of speculating. When you put money into a slot machine, you do not increase your ownership of it (or the company that made it). You are not building real assets. With speculation the lines are often more blurred. Buying Bitcoin, for example, could be regarded as an asset (of sorts). However, other practices such as buying CFDs (contracts for difference) involve betting on short-term share price movements without buying the underlying asset. This practice has been found by the Financial Conduct Authority (FCA) to result in most people losing their money – as many as 82%.
Willingness for risk
Would you rather have a high chance of winning £1,000, or a 50/50 chance of winning £2,000? If you prefer to go all or nothing – i.e. the latter – then you are a gambler. This helps to show how people do not need to visit a casino to gamble. It can be done even with established stocks such as those on the London Stock Exchange (LSE). If you put money into a volatile stock with a hope that you will quickly double your money, then you are likely gambling.
Investors, however, adhere to a slow and steady approach to making money. The story of the Tortoise and the Hare springs to mind, where the former beats the latter in a race using steady discipline. Even the investors with a high-risk appetite see their investments as long-term, and avoid trying to build wealth through day trading (a form of speculation).
Odds of success
Sometimes, investing and gambling can seem indistinguishable. After all, some investors place money into stocks without realising their gambling approach, whilst some gamblers can have very elaborate systems to help increase their chances of winning (e.g. a game of poker). Here, however, there still generally exists an important difference. With gambling the odds are usually stacked against you in favour of the house. For an investor, however, the odds are much more favourable. The S&P 500, for instance, has provided a 10% average historical return. When you speculate, however, again the lines become more blurred. The probability of failure is high but individuals such as day traders try to make educated decisions about the direction their trades are most likely to go in.
Diversification
Financial planners always recommend that people spread their investments out. Putting all of your money into a single tech stock would be foolish, since your fortunes would be entirely tied to that company. However, if you commit some of your money towards hundreds of companies across different markets, sectors and even countries then your portfolio is not threatened should any one of them underperform – or even fail. You can also include other asset classes alongside these company investments, such as UK government bonds (gilts). These involve lending to the government upon promise of repayment to you with interest, similar to a bank loan. Such bonds are also less affected by stock market movements, allowing you to protect the overall value of your portfolio should a crash occur.
With gambling and speculating, however, diversification is often minimised and ignored. With most forms of gambling, money is not usually spread out to reduce risk. Indeed, it is often focused on a single game with disproportionately high levels of wealth being concentrated on it. Speculation, in a similar fashion, often focuses on a single opportunity – or set of them – such as trading currency or cryptocurrencies. Again, this puts the speculator at considerable risk even if they have done a lot of due diligence before committing their capital. If things take a turn for the worse, they stand to be disproportionately harmed financially.
Invitation
With investing, there are no guarantees. Your capital is still at risk and you may get back less than you originally invested. Yet the odds are more in your favour and, by diversifying, you can mitigate needless risks and access opportunities in many different places. At Vesta Wealth, we do not gamble or speculate, we only invest in well diversified portfolios, matched to your attitude to risk and aims.
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.