"Risk" is often identified as a key difference between investing and gambling, but risk is more accurately called a similarity. While the degree of risk varies, risk itself is present in the most conservative investments and the longest of long shot bets. The most important difference between investing and gambling is ownership.

The definition of gambling is certainly broad enough to include the act of investing. If we equate gambling to high-risk investing, however, we leave out the most common form of gambling: wagering on games of skill and chance. From this perspective, investing and gambling are still very similar in that each offers a chance for high reward or total loss. They are different, however, because even the riskiest investments provide a degree of ownership that the "safest" bets cannot claim.

When we gamble, we buy an opportunity for a quick, and usually large, return. For most of us, there is also thrill and excitement. There is not, however, tangible ownership. If you doubt that, try touching your chips once you've played them at a table game in a casino. The only thing we "buy" is the moment and the potential, both of which can be worth every penny, but we own nothing tangible while we are in the act of gambling.

Investing always come with a degree of ownership. When we buy stocks, we are buying ownership in a company. We own a percentage of its profits, of its debt, and of its physical assets. When we buy bonds, certificates of deposit or other debt instruments, we maintain ownership of our principle as we are essentially loaning money to earn interest. For many of us, investing also provides a thrill. Watching a stock jump 10% in one day is on par with hitting 21, and watching a stock plummet on an earnings warning feels a lot like rolling craps.

To further illustrate the difference between investing and gambling, consider a hypothetical trip to a casino. The gambler plays Blackjack, Roulette and Craps against the house; the investor owns shares of MGM Mirage (MGM) and Wynn Resorts (WYNN). The gambler hits the slot machines and plays some video poker; the investor owns shares of International Game Technology (IGT), a company that manufactures and sells gaming machines.

Can both people from our example win big? Sure. Can both people lose all of their money? Absolutely. Risk is something that investing and gambling have in common. It's fair to say gambling is riskier than investing, and some investments are riskier than others. When we look for something that truly distinguishes one activity from the other, it comes down to ownership. When we invest, we own something, and when we gamble, we own nothing.

That's not to say gambling doesn't have its place. For my tastes, a well-balanced portfolio includes some stocks, a few bonds and the weekly poker game.

Learn more about this author, Scott Reichel.
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