Simran Kaur is co-founder of Girls that Invest, which offers commentary on personal investment aimed at young people. In this column, she answers questions from followers and readers.
Q: Isn’t the stock market like gambling? I want to begin investing, but I’m scared I’ll be throwing all my money into a stock market casino, and I just don’t know where to begin. The stock market seems to be so volatile in the last few weeks. How do you invest, taking on such big risks, without feeling like you’re gambling your money away?
A: This is such a good question.
It is one of the main concerns most new investors have when they finally decide to dive into the world of investing.
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After all, who wants to throw their hard-earned money into something where they don’t know if the outcome will be a positive one, or one that will leave them financially distraught?
The short answer is, there is a huge difference between the stock market and gambling.
With gambling, you’re taking a chance. A chance where you can’t control the dice or even conduct research on the slot machines and see their growth on revenue.
Instead, you’re working with random number generators instead of real businesses that have measurable impact.
In fact, the more you gamble, the more stats work against you, and the lower your chance of walking out of the casino with a loss.
Thankfully investing doesn’t work this way.
With investing, you’re going to encounter risks and that’s just the aim of the game. However, unlike gambling, you can research and mitigate these risks.
With the stock market, an investor can look at the returns of a company, how the company handled its latest PR disaster, read P/E and PEG ratios, and compare the business with others in the industry.
One important factor when it comes to investing is that you can decide to invest with different levels of risks.
You can be someone who wants to take on riskier investments like individual shares in growth companies, or cryptocurrency.
Or you could be an investor who would much rather focus on bonds or funds, who takes on lower risk, for lower rewards.
Thankfully with investing there isn’t a one-size-fits-all approach.
When it comes down to it, investing is based on a choice while gambling is based on a chance.