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Investing vs. gambling: Where should you draw the line?

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7 mins

If you followed the financial markets in January 2021, you undoubtedly remember the company GameStop.

Like many brick-and-mortar retailers, GameStop’s in-store business slowed to a trickle in 2020 because of COVID-19. To compound the problem, the company’s website was woefully inadequate when it came to e-commerce. GameStop was clearly in trouble, and by the end of the year, short-sellers (people betting against the company’s stock) were circling the water like sharks smelling chum.

In early January 2021, GameStop’s stock hovered around $17.25 per share. The share price began a relatively slow ascent in mid-January but exploded higher on January 21st. At its height on January 28th, the stock reached a pre-market high of over $500 per share, nearly 30 times higher than its value in early January.

What makes the GameStop story so unique is that the frenzy was triggered by users of an Internet forum on the social news website Reddit. If you read the comments on the site during that period, you’ll see that many of the people posting copies of their buy and sell orders for GameStop had no prior investing experience and had no knowledge of the company’s financial state.

The financial world and investors with many years of experience trading stocks denounced those who were causing the wild price swings of GameStop. They referred to them as “gamblers” who were merely guessing which way the stock price would move next without having any fundamental knowledge of the business or its finances.

How technology & social media fuel financial gambling

If you were familiar with what happened with GameStop stock before reading this article, you’re probably familiar with another company named Robinhood.

Robinhood is a relatively new trading tool that people install on their phones to buy and sell stocks. It’s an app on a smartphone that many younger and inexperienced “investors” began using during the COVID shutdown period beginning in early 2020 and was the primary method used to trade GameStop in January 2021.

Many people would have never bought GameStop stock without their smartphone and the Robinhood app. They only downloaded the Robinhood app after first learning about GameStop stock on Reddit. After quickly opening an account and transferring money from a bank account linked to their Robinhood account, they began trading the stock.

YouTube has also been a popular place to watch many self-proclaimed “financial experts” give financial advice to viewers wishing to learn more about the financial markets. Some of these talking heads provide sound advice for long-term investors looking to maximize their retirement accounts' performance, while others cater to the crowd looking for “the big score.”

Not to be missed is the popular social media site TikTok. Almost three-quarters of all TikTok users are between the ages of 13 and 24, many of whom are over 18, have money in their pocket, and want to trade stocks. They get much of their trading advice from 60-second snippets that provide lessons on investing fundamentals or give tips on the day’s “hottest stocks” from day-traders looking to pump up a particular stock’s price.

[ Related: Personal finance advice from TikTok: The good, bad & ugly ]

Is buying cryptocurrency investing or gambling?

Do you know what blockchain is? How about Dogecoin? Ethereum?

If you’re unfamiliar with these terms and just want to “buy Bitcoin,” you’re probably gambling.

Investors in crypto know that Dogecoin and Ethereum are types of cryptocurrency, just like Bitcoin. They know the exchanges these coins are traded on, their history, and other vital information that could influence their prices.

Everyone who buys cryptocurrency “hopes” it goes up, but some crypto buyers are operating on just a hunch. They’ve heard about it socially or read that Elon Musk bought Bitcoin. They buy without any basic knowledge of where crypto comes from, its current and potential uses, and how it increases in value. That’s gambling.

Are you an investor or a gambler?

While some people won’t touch a stock with a ten-foot pole and firmly believe there is no difference between Wall Street and Las Vegas, many people “play the market” by buying and selling stocks, bonds, and mutual funds. Are they investors, or are they gamblers? It truly is a fine line that separates the two.

Here are some questions to ponder that can shed some light on where you fall on the continuum.

  1. Do you expect an immediate return on your investment? Gamblers expect to see immediate results when they play slot machines or blackjack and expect the same when buying a stock. Investors buy and hold stocks with the expectation that the price will gradually increase over time.
  2. Do you understand the financial product and the risk? Some strategies like buying options or trading on margin are very complex. The risks are greater than buying and holding a stock. Investors understand the risks, while gamblers commit money without knowing how the end result is achieved.
  3. Is there a fundamental reason behind your belief a stock will rise? Investors typically understand a company’s fundamentals before writing a check. They research a company’s earnings, sales, profits, etc. Investors have a rationale for believing a stock will increase in value, while gamblers don’t have a logical reason why a stock should appreciate.
  4. Are you spending money you can’t afford to lose? Gamblers headed to the casino are often told, “Don’t bring money you can’t afford to lose.” Investors understand the financial risk involved with the stock market and choose their investments accordingly.
  5. Are you acting on research or hunches? Investors check out companies before they invest in them. They look for hidden values in a company and what the long-term outlook is for the industry. Gamblers, however, know very little about the companies they invest in. They simply hope they get lucky.
  6. Are you at risk of losing your entire investment? Investors believe in diversification and don’t put themselves in an “all or nothing” position. They attempt to limit their losses. Gamblers often go “all in” by betting all of their money on a single stock, like many people who traded GameStop did.

Beware of FOMO & your money

FOMO (fear of missing out) has been the cause of many people jumping in and buying a hot stock, only to see most of the money they spent on it quickly lost. Any stock that tempts you to “get in before it makes its big move” is probably a gamble, not an investment.

Taking a small percentage of your disposable income and taking an occasional plunge on a stock you feel good about because you like the company’s product probably won’t be hazardous to your long-term financial wellness. But, it’s not recommended if you’re not already contributing to a retirement plan, like a 401(k) or IRA.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published May 25, 2022
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