Are You Investing or Gambling?

Mention the stock market or investments and some families or organizations will react with loathing and disgust, likely drawing parallels between a trip to Vegas and a call to a broker. A good deal of this is due to the cultural aftermath of the Great Depression and the simultaneous drop in the financial markets as a result from the excess of the 1920’s. Yet, the primary reason for this attitude is a complete lack of understanding regarding accounting, finance, economics, and basic compounding. Yet, this attitude isn’t entirely irrational. Gasoline, for example, can be extraordinarily helpful if you are trying to power a tractor that will provide food to thousands of people. But in the hands of rash, uninformed people, you could end up with horrific physical damage and even the loss of life.

Without an understanding of what exactly a stock is, outside of an indexing strategy, the market can be a very dangerous place. (For information on what stocks are and how they are created, read Investing Lesson 1 – An Introduction to Wall Street.)

How do you know if you are gambling or investing? Here are a few simple tests to give you a clue.

Photograph by Robert Clare, Getty Images