I’m nearing the end of my college career (unfortunately!) and before I know it, I’m going to be out in the working world. I know that I need to save for retirement, and I know that I should invest money in order to do that. But, to be honest, I’m really wary of getting into the market. Correct me if I’m wrong here: investing is about buying stocks and hoping that they go up. If they go up, you get more money. If they go down, you lose money.
What about this is different than gambling? People consider gambling irresponsible and maybe even immoral, yet investing is seen as good and smart. I don’t get it–what’s the difference here?
At its core, an investment is somewhat like a bet. That can make investing seem scary–which is perhaps why 48% of Americans don’t own stock. But there are a few things that make investing a lot different than the type of gambling that you seem to be referring to, so let’s take a look at those.
Perhaps the most fundamental difference between gambling and investing is that investing helps a company. If you were to bet on the outcome of the NCAA basketball tournament (which, we are obligated to remind you, you should not do unless you’re in a state where it’s legal), your bet is not an “investment” because it does nothing to help the team you chose to win it all. By contrast, offering investments can be good for a company. Investing exists because companies use stock sales to raise money. If you ran a company and wanted to raise some money for your company’s next big move, one way to do so would be to sell part of the company off to people who believed in you. You could sell them each a share of the company and use the cash they gave you to make the company better, improving your company and therefore the value of the share you own–and the shares they own, too. This is pretty much how stocks work, and it’s a key part of why stocks serve a higher purpose than gambling.
It’s also worth pointing out that risks are different in casino gambling and sports gambling than they are in investing. The experts at Fantasy Champs hope you’re winning one of their fantasy football rings instead of your friends’ cash in your league, but whatever is at stake, they point out, your odds of winning it aren’t great. Like stock picks, there’s some skill in identifying the right fantasy lineup. But while the stock market generally goes up over time, making a diverse portfolio a good bet to earn money, the default odds of winning a fantasy football league are 1 out of however many people are in your league: 1 out of 6, 1 out of 10, or whatever the case may be. Fantasy football is legal to bet on because it is considered a game of skill, but there’s enough luck involved that you would not want to bet your retirement on your one team out of eight even if you were the best fantasy football player on the planet!
That’s not to say that you can’t take big risks in stock investing: you certainly can. You can use calls and puts to short stocks, promising to sell stocks you don’t have at a given price in the future. If they plunge in value, you can buy them cheap and fulfill the contract at a profit–but since they can rise, your risk is virtually unlimited. But you don’t have to invest like this. The experts at covered call screener Born to Sell point out that covered calls (which involve owning the stock you sell an option on) are safer. Safer still is a simple, diverse portfolio that holds a lot of stocks for a long time and rounds things out with bonds and other investments. The Dow is up 1,600% over the past 100 years, so investing has generally been good for Americans (you need a diverse portfolio and bonds, of course, because in the shorter term any stock or group of stocks can plunge in value).
In short, the stock market is a place where you can gamble as recklessly as in any casino. But it’s also a place where you can invest in a healthy way, helping companies raise money while limiting risk and, most likely, getting a good return that beats inflation and outperforms savings account interest rates.
“Invest like a bull, sit like a bear, and watch like an eagle. (Mantra for long-term investing)” — Vijay Kedia