How Gambling Works and
Why It Is Different From Investing
In a game of chance, you give money to someone who then keeps some and distributes the rest as winnings. With the lottery, only 50% is distributed; the lottery company keeps the remaining 50%.
With shares, you give your money to whom? To the corporation? No. Okay, with an IPO you do, but normally you buy shares on the stock exchange. So, you buy the stock from someone who previously owned that stock. This also entitles you to the company’s profits. And the more profits a company makes, the more people want to share in it, which then increases the price on the stock exchange.
Is binary options gambling? With gambling, chance decides whether you get paid or not. This sounds a lot like binary options. With shares, the success of the company decides everything, which doesn’t have much to do with chance. Otherwise, it would also be gambling if a bank gave a loan to an optician so that he could open his store.
Interestingly, it is usually the case that people who think that companies are getting in more and more money also think that shares are gambling. However, the two views are mutually exclusive. If companies are raking in more and more money, then surely buying shares in them would be a must?
Of course, there is always a residual risk. A company can go bankrupt. Just as an employee can be laid off. Just as a fully trained person can be unemployed. But that has nothing to do with gambling, does it?
It is important to remember that gambling and investment serve different purposes. People come to neteller casino to have fun and maybe win some money, the same people go to the stock exchange to invest their money and multiply it in a long run. Gambling is entertainment, investments are much closer to a real job.
Investing when you don’t know much
Is stock trading gambling? There are certain risks, but with enough knowledge, you can make a profit. In addition, now there is the possibility to invest in a fund. A stock fund works like this: many investors pay money into a pot and professionals buy stocks with it. This has two advantages:
- First, the money is invested by professionals;
- Second, the risk is spread over several shares.
The first advantage cannot be denied, but it is also a serious disadvantage at the same time: the management fee. The professional does not do the whole thing out of charity. And so a certain percentage is retained from the fund assets year after year (together with other fees, this often averages out to 1.6%/year).
The second advantage is the diversified risk. If you put all your eggs in one basket, you can win a lot. That is, if things go well. On the other hand, you can also lose a lot. If you have spread your money, then the risk is also limited. A single company can go bankrupt - but all together? Highly unlikely.
How to minimize risk
Now that we have eliminated one risk factor (not putting all your eggs in one basket), let’s turn to another risk - timing.
If you had bought at the bottom and sold at the top, you get a huge profit. But things are not that simple in reality. How do you actually know whether a stock has reached the bottom? How do you know later that we have reached the peak? These are simply things that cannot be known in advance. Thus, one can practically never know the optimal time to buy/sell. Investments are always associated with a certain risk if you want to invest a certain amount only once.
Buying shares on a regular basis has the advantage: you have acquired the shares at an average price. Even better, if you always invest a constant amount, you will find that more shares were purchased at a low cost than at a higher cost. Here is a small example.
Someone invests 1000 Euro in shares:
- The first time the price is 50 Euro. So the person buys 20 shares;
- The second time the price is 100 Euro. So he buys 10 shares.
At first glance, one could assume that the average purchase price would be 75 euros. But far from it. This certain someone has spent 2000 euros and received 30 shares in return. So he spent 66.67 euros per share - not 75 euros. This effect only occurs if you buy shares regularly.
There is an obvious difference between investing and gambling. As you could see from this article, investing provides a lot of opportunities to minimize risks and make a profit, as you get a chance to analyze the market before you buy a share of a company. Gambling, by contrast, means that there is no chance to use certain research skills to lower the advantage of the casino.