Personal anecdote
When I was about 10 years old, I vividly remember my dad mentioning his investments in passing. I asked “What does investing mean?” He told me “investing is a way to put your money towards growing a business. If the business succeeds, you get rewarded with cash”. I immediately did not like this idea. We went on to have a debate on whether investing is gambling. I was convinced it was, and after a long conversation, my opinion did not change. His explanation wouldn’t help, I needed to read about investing for beginners.
Fast forward seven years later, I’m in my economics class in school. Early on in school, I was always interested in finance. I would often talk to my economics teacher after class. One day we started talking about investing. At this point, I came to understand that investing is probably not gambling. But I didn’t know.
We ended up having a very long conversation about what investing is. This conversation convinced me that I had to do everything in my power to understand how to invest. And I’ve been investing for the past 10 years.
At the time, reflecting back on my 10 year old self, I felt bitter towards the way my dad explained investing to me. To his credit, he tried dumbing down the concept so that a 10 year old could understand it, and it didn’t hit the mark. Ideally, I would have found a blog about investing for beginners.
I understand many don’t have parents that know how to invest, or may not be good at explaining it. In this blog, I will help you understand the basics of what investing is, how it’s different from gambling.
Investing for beginners: what is it?
Investing is making your money work for you. Think of investing like planting a seed. You put that seed (your money) into the ground (stock market, real estate, a business, etc.). Over time, with the right conditions (logical decisions, market growth), that seed grows into a tree (more money).
Investing is putting your money into something that has potential to grow in value over time. Investing in the stock market, for example, means buying a piece of a company (stocks) and in return, you expect more money given back to you in the future.
The key word in the last sentence, and my main debate with my dad when I was 10 years old, is the word “expect”. Why should you expect something to grow in value over time? When I gamble I also put money towards a goal and expect the value of my money to increase. Isn’t investing the same as gambling?
Investing for beginners: Difference between investing and gambling
The simple answer is no, investing is not gambling. They may seem similar because they both involve risk and the possibility of losing money. But they’re quite different when you begin to understand what investing is. I’ll explain in three easy ways why investing is not gambling.
#1: Capitalism-
Historically, businesses have employed workers that create more money for the business than their what they get paid. If this wasn’t the case, there would be no incentive to hire employees. This excess value goes to the owners of the business. When you invest, you are part owner of a public business. Why not be a part owner, and indulge in the earnings of value created, in the form of money? When person A gambles at a casino and the business makes money, this means person A lost money. When person A invests in a company and the business makes money, this means person A made money. This is the fundamental difference between investing and gambling.
#2: Information availability-
Information is valuable in both gambling and investing. The main difference is the availability of the information.
With buying stocks of a company there is information about the company’s earnings, hirings, growth, and management team. It is also helpful to know historical trends of a company’s success, like understanding if sales are trending upwards or downwards. Understanding this information can provide insight into whether the company may be successful.
With gambling, besides the rules of the game you are playing (that aren’t in your favor), there is no additional information that can help you make a decision. An example is playing blackjack. You may know that it is statistically advantageous for you to not “hit” again when you get the number 17. But you do not have additional information that can help you expect what card you will get next or what the dealer will get. Also, there is no sense in studying historical trends of a blackjack game. It doesn’t matter what happened in the past with the game, your odds will always be the same!
#3: Statistics-
Speaking of odds, the odds of success are in your favor in the long run with investing. Since its inception, the stock market has returned an average of 8% per year. This may seem like a small number, but can mean extraordinary financial gains in the long run. If you were to put $10 into the stock market 100 years ago, it would have been worth over $22,000 now. Sure, the stock market goes up and down. But in the long run, the economy only grows. Over the past 100 years, there have only been two 10-year stretches where the economy didn’t grow: the Great Depression in the 1930s and the 2008 housing crash. But still if you had invested in 1930, the gains would have far outweighed the losses.
Gambling is less in your favor the longer you play. Over a short stretch, you may get lucky and win something here and there. But in the long run the saying goes “the house always wins”. This means the casino always wins at the end because the odds of the games are in their favor. If this wasn’t the case, casinos wouldn’t stay in business.
Investing for beginners: what you should do next
By now, I hope you understand at a basic level what investing means and why it’s different from gambling. You may be wondering what you should do next to get your foot in the door and start investing. I recommend checking out morningstar’s Early Investor Education course. This investing for beginners course is free, quick, and will get you started rather than just planning on how to get started.
Also, I urge you to stick around for my blogs where I will continue to talk about all things personal finance! For example, here is one of my blogs on index fund investing.