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How Investing and Gambling Differ: Essential Information for Punters in SA
Gambling and investing both involve risking money. Other than that, though, they have little in common. When you invest, you acquire an ownership claim on an asset that can earn income and appreciate. When you gamble, you’re making a wager that will either payout or expire worthless. Both involve risk and unknown, but only one allows for wealth creation.
Key Differences at a Glance: Risk, Ownership, Time, and Expected Return
This table below highlights the fundamental difference. Investing allows you to own a productive asset or claim on cash flow. Gambling typically has negative expected value once you take into account the house edge/bookmaker overround.
| Activity | Source of Return | Ownership Claim | Expected Edge | Typical Timeframe |
|---|---|---|---|---|
|
JSE Shares/ETFs |
Earnings, dividends, growth |
Yes, part-owner |
Positive over long run |
5 years or more |
|
Bonds/Income Funds |
Interest coupons |
Yes, creditor claim |
Positive, defined |
1 to 10 years |
|
Sports Betting |
Payout if bet wins |
None |
Negative after overround |
Minutes to days |
|
Casino/Lottery |
Payout if outcome hits |
None |
Negative, fixed house edge |
Seconds to a draw |
An average sportsbook overround of 105-110% tells you the odds are stacked against you, before a single bet has won or lost. Investment returns, conversely, are ultimately dependent on GDP growth, corporate earnings and interest rates.
What Counts as Gambling and What Counts as Investing in South Africa
Gambling includes sporting bets, casino games such as roulette and slot machines, horse race betting at events such as the Durban July and lottery style wagering such as South Africa’s National Lottery. A stake is wagered, consumed in exchange for the opportunity for a payout.
Investing includes assets where you acquire an ownership/creditor claim:
- Shares listed on the JSE, which represent partial ownership of a business such as those tracked by the FTSE/ JSE Top 40 index.
- Exchange traded funds and unit trusts, which own portfolios of investments on your behalf.
- Retirement annuities and pension funds administered under the Pension Funds Act.
- Government and corporate bonds which pay interest coupons.
- Tax free savings accounts up to R36,000 per annum and R500,000 lifetime contributions.
Speculation is the grey area. Day trading and volatile crypto coins can technically involve investing in an asset but if you buy and hold for mere minutes based on price momentum, then it’s really no different to placing a bet.
Risk and Return: How The Math Differs
Gambling and investing both have variance (the amount of swings). The critical distinction is expectancy. A built-in house edge/overround ensures the operator has a built-in advantage, such that placing wagers repeatedly will tend towards losing money in the long run.
Returns on investments are not paid by the investor. They are derived from profits, dividends, bond interest payments, and general economic expansion. This is why a well-diversified investment portfolio will produce a positive expected return over the long term, even though yearly returns may be negative.
Ownership, Cash Flow and Wealth Creation
When you purchase an investment, you own a piece of paper that represents a legal entitlement: stock entitles you to dividends and voting, bonds to coupons and principal payments, fund units to a proportional share of the underlying assets. That piece of paper is itself an asset you can trade, pledge as collateral or leave to your heirs.
A gambling wager does not provide you with that. When you gamble your money, you are forfeiting it with the hope of receiving something else in return. If you win or lose, you will not have an asset to account for on your balance sheet tomorrow.
Compounding Versus House Edge in Rand Terms
Imagine two investors both wagering ZAR1,000 per month for 10 years. One gambles at a casino with the house advantage. The investor earns our assumed long-run nominal return of 9% per year from investing in a broadly diversified ETF. After ten years, the ZAR120,000 of contributions grows to a little more than ZAR193,000.
The gambler stakes ZAR1,000 each month. However, he's playing against a sportsbook operating with a low 5% vig. EV bleeds steadily, never positive, and his ZAR120,000 risked over 10 years is never given the opportunity to achieve a cumulative balance, instead just circulated as winnings turned back into bets.
Tax Treatment in South Africa: Capital Gains, Income, and Gambling Winnings
Tax is another distinction between investing and gambling. Capital gains on assets sold for a profit are taxed at up to 18% (effective rate) after your annual ZAR40,000 allowance, whereas interest in excess of ZAR23,800 per year (for those under the age of 65) is taxable as income, and local dividends are subject to 20% withholding tax. Casual winnings from gambling locally with a licensed operator, however, are normally tax free. This may change if you make a career out of betting.
Conclusion: Why Investing and Gambling Should Not Be Treated as the Same Activity
Gambling is different from investing. Investing is the purchase of ownership. When you invest you buy a piece of the cash flow, you buy a long term positive expected value, and you benefit from operating leverage. When you gamble you trade your buy in for a structural negative expectation and receive minimal consumer protections from being considered entertainment.
Frequently Asked Questions
How Does Investing Differ from Gambling?
Investing differs from gambling in that you work to earn your return by owning something productive that has positive expected value over the long term. When you gamble there is always a house edge/bookmaker overround of about 105-110% built in which causes the gamble to have negative expected value.
Is Investing Counted as Gambling?
Investing is not gambling if you purchase diversified assets, do your research, know what you own, and think long term instead of attempting to forecast price movements repeatedly. However, trading excessively with high turnover and no risk management is gambling.
Are Gambling Winnings Taxed Differently from Investment Profits in South Africa?
Dividends are taxed under the SARS rules. Capital gains tax is charged at an effective rate of up to 18 per cent, depending on your tax bracket. Ordinary casual winnings on local gambling are generally tax-free as income. Check with SARS for up-to-date rulings.
