Are you Investing, Speculating or Gambling Your Hard-Earned Money?

Whenever there is a discussion or analysis on a decision that entails potential profits and losses under risk or uncertainty, it is only that you ask yourself one simple question: Am I speculating or gambling my hard-earned money? It is important to recognize the rules of the game that you are playing. Understand the underlying stakes, the risks and the goals. As well as, understanding the role that luck plays in it.

If your goal and life’s work is to deploy strategies to build wealth and reach your goals, it is essential to understand the difference between speculation and gambling.

Many people these days have never really truly invested before. Thus, consider investing just another form of gambling – and therefore, rely on luck to win. Additionally, young people, these days are placing betting into their investment portfolios as a legit form of investing. As such, consider gambling as a viable investment for their money.

Difference Between Investing, Speculation and Gambling

There are many superficial similarities between investing, speculation and gambling, however, the real difference lies in the definition.

• Investing is putting your money in financial schemes, shares, property or commercial ventures with the expectation of achieving a profit. Investors, employ their money to acquire certain assets after due diligence for a mid to long period, with the objective of wealth creation and additional income in the future.
• Speculating is investing in stocks, property, or other ventures in the hope of gaining but with the risk of loss. An investor seeking to speculate typically employs their money to acquire assets to take advantage of functions in underlying asset prices in the short term.
• Gambling is a game of chance for money; betting. An investor when gambling employs their money for entertainment, while the chances of return depending upon the probability of a particular situation or event.

Let’s dive a little deeper –

What is Investing?

Investing is what we should all be doing and it consists of opportunities that have a greater likelihood of being profitable. It means consistently working to grow your investment portfolio over time, not necessarily always seeking to beat the market. With investing, there is an expectation from investors of a return in the form of income or price appreciation. Additionally, there is an attempt to profit from ownership of financial assets i.e. value addition, return on investment or dividends.

Risk and return go hand in hand when investing, where low risk generally means lower expected return and higher return accompanied by higher risk.

Related: How to Build a Passive Income Strategy

What is Speculation?

Also referred to as trading, mainly done in the short term but investors can also go long-term with certain assets like real estate.

Speculating involves calculating risks and conducting research before entering a financial transaction. Therefore, a speculator buys and sells assets in hope of realising a bigger potential gain than the amount he risked. Thus, a speculator takes a higher degree of risk and knows that the more risk they assume, in theory, the higher the potential return. However, they also are fully aware that they may lose more than their potential gain in the transaction.

For example, consider an investor who trades in currencies. They may speculate that the Kenyan shilling will depreciate to Ksh 200 against the dollar by the end of a certain period due to the strong economic indicators. If their analysis is correct, they will sell their Kenyan Shillings and buy more United States dollars with the hope that the Kenyan Shilling will depreciate further to Ksh 200. However, if they are wrong, the investor can lose more than their expected risk. That is, if the Kenyan Shilling appreciates against the United States dollar, then they would have bought the dollar at a higher rate than the realizable rate in the future.

Related: How to Reduce Investment Risk In Uncertainty

What is Gambling?

Conversely, gambling involves a game of chance – playing with a chance for stakes. Generally, the odds are stacked against the gambler as the probability of losing an investment tends to be higher than the probability of winning. This is because the gambler typically has little to no knowledge of what they are doing and thus has a higher risk of losing the investment.

For example, consider a gambler that opts to invest in the stock market without conducting any technical and fundamental analysis. If you are unaware of the current happenings in the world of business and finance in general, any decision you make will be like a gamble. The basis of the decisions you make hinge on your excitement and intuition.

Speculating Vs Gambling: Key Differences

Although there may be some superficial similarities between speculating and gambling, key definitions of both reveal the principal differences.

• Speculation is a financial transaction with a substantial risk of loss and expected significant gain. With Gambling, the probability of loss is usually higher than the likelihood of winning. Thus, consists game of chance.
• In financial markets, gambling is often evident in people who do it mostly for the emotional high they receive from the market’s excitement and action. Speculating, on the other hand, trading decisions are driven by market research and indicators.

Investing Vs Gambling: Key Differences

Some things that one might consider as an investment, may actually be a gamble. Let’s look at the similarities and differences between the two.

• Investing and gambling both involve risking capital in the hopes of making a profile. In both, a fundamental principle is to minimize risk while maximising reward.
• Investors always have higher odds than gamblers. Their assets, over time, grow and creates wealth. On the other hand, gamblers own nothing and play a game, where the house always wins.
• Investors have avenues to mitigate losses such as selling the assets they own.  Gamblers, on the other hand, have fewer ways to mitigate loss and tend to lose everything.
• Investors tend to be more disciplined and have a wealth of information to research and base their investment decisions on. On the other hand, gamblers rely on emotion and intuition rather than knowledge.

The Bottom Line

Ultimately, gambling is like a tax on boredom. It can destroy your financial and mental health; I would not recommend it. Speculating is a different animal with some investing elements. It requires you to trade your night’s sleep for some extra profits. Investing is the most preferred  – focusing on a passive investment approach: long-term ownership of well-diversified investments (equity, bonds and real estate).

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