By Babajide Komolafe
There is a world of difference between investment and gambling. Knowing the difference is critical to your efforts to build wealth. Many people are gambling but they think or claim they are investing. These include putting money in cryptos and forex trading. These are not investments, they are pure gambling.
I had an experience in gambling when I was young. Myself and some friends used to organise gambling vigil during which we gamble with dice throughout the night. It was during one of these vigils that I decided never to gamble again. Why? I discovered that in gambling, you may win sometimes but you lose most of the time.
Gambling is putting your money in something not tied to any tangible productive activity. In other words, the money you put in is not being used to produce goods or services that will lead to revenue and profit, from which you can earn a return on the money you put in. Also and as a result, the outcome or end result is not determined by circumstances you can understand and use for informed decisions. In gambling, the outcome is purely based on chance.
That is why putting money in cryptocurrency with the expectation that the price will one day go up is gambling. But putting money in stocks, treasury bills, commercial papers, mutual funds, real estate etc is investment.
Let’s consider the example of stocks also referred to as shares. Stocks are basically ownership of a company. And this qualifies you to share in the decision making of the company and also in the profit of the company in the form of dividend. And there is the added benefit of the gain you can make when the price of the stocks go up. And that is if you choose to sell the stocks. The prices of stocks of well managed and profitable companies do rise over time. The price of the stocks of such companies may fluctuate, but they rarely crash, because they have a history of profitability. Hence if you put your money in stocks, you have bought ownership of a company that produces goods and services from which it will generate revenue and make profit from which it will pay dividend to the owners (shareholders). Thus, the ultimate outcome of the money you put into the stocks of the company is determined by the commercial activities of the company, the quality of its goods and services and the demand for them as well. Hence, every year, you will earn money from that investment in spite of fluctuations in the price of the stocks of the company. The same principle applies to money you put in treasury bills, commercial papers, mutual funds, real estate, leasing/rental business etc.