The Hard Working Dollar

Separated at Birth: Investing, Saving, Trading and Gambling

While some people may get investing, saving, trading and gambling confused with each other, there are some distinctions that separate these not too distant cousins.

Most of the confusion revolves around the fact that most people never really consider the objective for participating in each of these activities.

Investing
According to Wordnet, investing is defined as

laying out money or capital in an enterprise with the expectation of profit.

When compared to saving, trading and gambling, investing is distinct because when a person or enterprise invests, there is a reasonable expectation of profit.  Additionally, while more similar to saving and trading all investing activities have an inherent amount of risk.  However, the likelihood of the investor losing all of their money or capital is minimal, because money or capital is allocated to assets which usually have an intrinsic value.

Saving
Saving is the activity of protecting something from loss or danger.  When it comes to finance the “something” that your are protecting from loss is your hard earned money.

In simple terms, saving is delayed spending.  Most often, saving money is done in anticipation of future purchases and/or unforeseen expenses.

Saving is distinct from investing because there is no expectation of profit from your savings.  However, in today’s advanced financial markets, institutions reward individuals for saving by offering the ability to earn interest on their savings while knowing that their funds are insured against loss by the Federal Deposit Insurance Corporation (FDIC).

Saving is far from trading and no where near gambling.

Trading
Trading is defined by Wikipedia as

the buying and selling of financial instruments such as stocks, bonds, and derivatives.

Trading like investing comes with the expectation of profit, however the two are distinct in that traders 1) usually specialize exclusively in financial instruments and 2) have a shorter time horizon for realizing their expected profit.  In a sense a trader can be viewed as a short term investor.

One major distinction between investing and trading is the use of gearing or leverage when purchasing the various financial instruments.  Leverage allows the trader to use other institution’s monies and capital to buy financial instruments and as a result it multiplies the trader’s gains and losses.  Therefore, the trader must use proper risk and money management in order to decrease the probability of losing all trading capital due to the leverage’s multiplying effect.

Trading is closely related to investing, is not very related to saving and is a gamble.  In my personal opinion, trading is a gamble only because of the potential to lose all trading monies if risk and money is not properly managed.  The same amount of risk is not found when investing due to the minimal amount of leverage used on average.  Additionally, the minimal reliance on chance and the uncertainty separate it from gambling.

(Note from the Devil’s Advocate:  Individuals who play poker for a living are gambling, but it is somewhat biased to consider it a gamble if these individuals can consistently withdraw profit over several years.  Also, several professional gambler’s have stricter risk and money management rules than some of the traders and investors I know.)

Gambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods.

Due to the heavy dependence on chance and uncertain outcomes, gambling cannot be considered a viable means of investing, saving or trading.

Now that we have gone through four topics that have caused many heated discussions over the years, hopefully you are better prepared to discuss these topics at the next outing you attend.  If not, you can always just tell the other person that they know nothing about anything and put your fingers in your ears.

Also, share this with someone you think would like the information and share it ten times with someone you think would hate it.

(Image Source: Flickr user Juju Inspired)

Related posts:

1. Investing For Non-Investors: Why You Should Invest.
2. Investing For Non-Investors: What Is Investing
3. What Is Foreign Currency Trading?
4. The Hard Working Dollar Weekly Roundup 08/09/09 – 08/15/09
5. Investing For Non-Investors: Where Do I Start?