A common thing said by amateur investors is that investment in stocks and investing in general is a form of gambling. There is some truth to this, but the comparison really depends on the risk level, market conditions and types of investments you’re making.
There are multiple types of investing. Purchasing property, commodities, NFTs, cryptocurrency, fine art, memorabilia, businesses, etc., are all forms of investing in stocks. For stock investing, you get short or long stocks, purchase and sell different categories of stocks, and purchase different classes of stocks.
You can also make other types of safer slow-growth investments like mutual funds, bonds, index funds, and ETFs. Some of these investments can mitigate risk when an active manager is looking after them. Mutual fund investments may be compiling partial investments in multiple stocks with other investors; This allows for investments in safer, more expensive stocks – which you would not be able to purchase with the entirety of your assets.
Moving back to risk, let’s take a look at the differing forms of investing by risk category and see how they stack up.
High-risk vs Low-risk investing
A high-risk investment is a large or a core investment in an unsafe stock. High-risk investments, are often done by amateur investors on a whim or can also be done because of faith in a particular company or understanding of the stock market. High-risk investments, according to top brokerage firms, may be different from individual investors.
Look at what happened with the GameStop share prices and the inflationary effect it had on other less economically valuable stocks. Individual investors caused this price increase. It’s commonly known that GameStop was the most shorted stock; Purchasing GameStock was risky for everyone on Wall Street, yet it made many individuals wealthy.
Arguably to an extent typical classic high risk investments can represent the same or worse odds than you would receive at a casino, and some even earn real money on the latter.
Low-risk investments are made with the intention of long-term growth over short-term growth. Bluebook stocks, mutual funds, and government bonds can all be different types of low-risk investments.
This type of investing has an extremely low risk profile but as with any investment you can always lose all your money or more, for bonds for particularly in depends on the bonds your buying, terms and who from (i.e. American bonds Vs Argentinian bonds).
Market conditions affect risk profile
While we’ve broken down risk, all things investment are open to change and risk deviates depending on marketing dynamics. From a stock market point of view there are several market stages that change risk and profile on differing investments.
A bullish market, also known as a buyer’s market, is when the financial market is striving forward, and investor confidence is at its highest. Diametrically opposed to this idea, investors are more confident with their investments, and therefore risks can be mitigated less. While the market is more volatile, meaning stock prices are less stable, this can pay off provided you get out before the inevitable bearish market hits.
The opposite of a bullish market is a bearish market. Bearish markets occur during periods of economic downturn. People generally are selling their stocks and are making little investment.
The investments that do happen are low-risk investments. However, making big plays would normally be considered a gamble.
Understanding investment risk & market conditions
As you’ve seen varying types of investment from stock trading to crypto, all carry standard perceived risks to some extent, and in varying market conditions these profiles can change.
They key thing when assessing what to invest in, to what amount and how is to gain a technical understanding and ability to understand market signals in your particular investment area.
Finally remember every form of investment carries risk, never spend or leverage more than you can avoid losing and think logically not emotionally.