Casino finance

What Is Casino Finance?

Casino finance is a slang term used to describe a financial or investment strategy that is considered extremely risky. Put simply, casing finance is a type of strategy that involves high-stakes (market) bets where the investor has no control or sense of the outcome. These trades can result in major losses or, in some cases, major gains. In some cases, Wall Street offers risky strategies or investments akin to playing the lottery in hopes of hitting the jackpot. It’s argued that casino finance isn’t necessarily investing, but rather gambling. 

How Casino Finance Works

Casino finance gets its name from casinos and gambling, where players generally have little to no control over the outcome of their bets. In most cases, the odds often favor the house in a casino rather than the player.

The idea of betting on the house with no idea of the outcome is translated to certain high-risk investments. In this sense, investors make large bets on investments that typically involve high stakes with an anticipated high potential reward outcome. As with betting at a casino, the investor could lose it all.

Casino finance generally refers to high-dollar bets in the markets, either involving high-risk investments and/or highly leveraged accounts. Investors who employ these tactics usually take large risks to attempt to earn large rewards. While most investors prefer a more conservative approach, some investors are comfortable undertaking a large amount of risk, to have the opportunity to secure large returns.

This tactic isn't meant for everyone. Because there is a greater likelihood of loss, the average investor shouldn't undertake any of the principles associated with casino finance. As such, this kind of strategy—and any other similar styles that rely on speculation—should only be considered by experienced investors who can sustain major losses when they happen.

Special Considerations

According to an article published in National Affairs, “Against Casino Finance,” an overly permissive trading culture results in casino finance. In the piece, authors Eric Posner and E. Glen Weyl argue that free-market enthusiasts represented best by libertarians, would do well to impose limits on gambling in financial markets.

The authors cite the rise of derivative securities as being problematic and high-risk gambling. Derivatives are, as the name suggests, built upon other transactions and operate based on a predictive model of these other transactions. The authors cite correlation swaps and the tranched collateralized debt obligation (CDO) products as examples of derivatives used primarily for gambling.

The authors respond to libertarians and other laissez-faire advocates who might want to permit any voluntary transaction not directly harming a third party. They argue that many investors have no understanding of financial market risks and that it isn’t always clear that they even know they are gambling. The authors claim that financial market gambling “deliberately generates risk to allow people to get ahead without making the productive economic contributions usually required as a condition of acquiring wealth.”

The lack of regulation leaves investors particularly vulnerable, which the authors say is primarily due to the dual nature of derivatives as a "reckless" gambling device and legitimate insurance. Ultimately, financial-market gambling “sets the stage for systemic crises like the one we experienced in ” The authors call on Republicans and other conservatives to use their track record on limiting other forms of gambling to seek regulations and hobble casino finance activity.

The Bottom Line

If you've ever gambled, you know that you're playing a game of chance. There is a chance that you may beat the house but there's an even greater possibility that you'll lose all your money. Your bets are primarily based on speculation. The same principle applies to casino finance. With this investment tactic, an investor makes high-risk bets that the market will move one way or another so they can capitalize on big gains. Having said that, you should only consider this if you're an experienced investor and are able to bear any major loss that may come your way.