Stock market investing is generally not well understood and many people compare it to gambling. Given that both involve a degree of risk and that it’s possible to lose money when investing in stocks in the same way you can lose money when gambling, it’s easy to see why some think this way.
However, when you get to understand how stock market investing works, and realise long-term investing is a proven way of building wealth, it becomes clear it’s nothing at all like gambling. Here’s a look at how the two differ.
When you bet on a horse race or football match, or play roulette at a casino, you’re gambling. You’re wagering money on an event with an uncertain outcome, in the hope of winning more money.
The thing about gambling is it’s very hard to make consistent profits. Sure, some talented individuals do make a living betting on sports or playing poker but, in general, most people just end up losing. One of the reasons for this is that gambling is a zero-sum game – winners merely take money from losers. Add in the bookmaker’s or casino’s edge, and the odds are against you. That makes it quite challenging to win consistently.
Investing is very different. The main thing to understand about stock market investing is that, over the long term, stock markets tend to rise, meaning if you’re willing to invest for a number of years, the odds of profiting are in your favour.
For example, since the FTSE 100 index was launched in January 1984, it’s risen from a value of 1,000 points to around 7,500 points today. Similarly, over the last 20 years, the S&P 500 index has risen from around 1,300 points to near 3,000 points.
What this means is that if you’re willing to invest for the long term, there’s a good chance you’ll make a decent return on your money. Studies back this up. According to this year’s Barclays Equity Gilt Study, since 1899 British stocks have returned around 5% per year on top of inflation. In other words, long-term investing is a proven way of generating wealth.
Of course, if you’re investing on a short-term basis, it’s a little bit like gambling, simply because market movements can be unpredictable over shorter periods. No one knows what the market will do tomorrow, or over the next week. However, if you follow experts’ advice and invest for a minimum of five years, the chances of losing money decrease significantly.
In summary, when you compare gambling to investing, you’ll see they’re very different things. With gambling, it’s very hard to make money consistently. But with investing, there’s a good chance of earning a decent return on your money as long as you’re in it for the long term.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.