When you invest, are you leaving your wealth to chance? Let’s take a closer look at investing, gambling and speculation to understand the fundamental differences between the three. And the common thread that ties them together.
To an outsider, the stock market may look a lot like gambling. In fact, that view may be the default for anyone who grew up without friends or family in finance.
There’s a good reason for it: Hollywood has had lots of fun telling stories about the dramatic, high risk/high reward end of investing, and that’s had a much bigger audience than featuring investors seeking modest incremental returns.
The reality is that gambling, speculation and investing all share one thing in common: the notion of risk.
Each option is separated by subtle differences that aren’t black and white, and instead, exist on a continuum. This means that there truly are investment options for every personality type, and appetite for risk. Let’s break down each type with an example:
Whether you’re playing roulette or tossing a coin, both end in a 100% random outcome. If you play once or ten times, any knowledge you bring to the game won’t ever influence the result.
Investing is at the Other End of the Spectrum
The example of investing in a residential property shows us how knowledge can influence an investment’s outcome.
If you thoroughly research a town or city – its population growth, local industries and upcoming opportunities – you can eventually conclude whether or not a residential property is likely to deliver rent payments and, potentially, property appreciation.
Speculation Sits Somewhere in the Middle
You may find yourself confident that a change is on its way – maybe it’s a biotech start-up that will transform public health, or a junior mining company likely to strike gold in the Australian Outback. Speculation means taking a leap with your money on some of these educated guesses… with both higher risks and high potential returns.