Many times when discussions are held about finances the question of trading, more so stock trading being similar to gambling is raised. True, both investing in the stock market and gambling involve risk and choice. The risk is specifically of capital with the hope of future profit. Trading and gambling differ in that gambling is typically a short-lived activity while the equities of trading often last a lifetime. Gambling also presents negative expected returns to the gambler in the long term while the traders often carry with them a positive expected return in the future.
The expectation of a return in trade in the form of income or price appreciation is the foundation of the investment itself. In trading risk and return accompany each other; low risk generally means low returns, while higher returns are the result of higher risks. An investment risk management strategy is therefore paramount since in trading capital is spread across different assets, this helps to minimize potential losses. To make reasonable decisions trade investors study trading patterns by interpreting stock charts. The trade market technicians leverage the charts and try to predict where the stock is going in the future. It is important to note that in gambling bettors own nothing but when people invest in trade they own a share of the underlying company.
Gambling is staking something on contingency and is commonly known as betting or wagering. It means risking money on an event of uncertain outcome and heavily depends on chance rather than logical prediction. Just like investors, gamblers also weigh on the amount of money they are willing to risk. Most professional gamblers are competent at risk management. They invest heavily on research of teams or players histories to try and predict a possible outcome. These gamblers also take note of their opponent’s mannerisms and their betting patterns with the hope of getting useful information.
It is also worth noting that in casinos gamblers play against “the house” and in sporting activities gamblers bet essentially against each other. In gambling, odds are determined by the amounts of money placed and are constantly changing up till the actual activity starts.
The odds are generally stacked against the gamblers and the probability of losing a gambling investment is often likelier than the probability of winning more than the investment made. In other cases it is more likely to breakeven than to actually make a gain. The chance of gamblers to turn profits are further reduced if they have to put up additional amounts of money beyond their bet. This added amount is kept by the house whether the bettor wins or loses, this amount is referred to as points. Points can be compared to the broking fee paid by a stock trader. Gamblers have fewer ways to control their rewards than traders do hence trading is safer.
The key aim for both trading and gambling is minimizing risks while maximizing profits. In gambling the house always has a mathematical advantage over the gambler and this advantage increases with time spent in gambling. This aspect differs with trading in that the stock market constantly appreciates over the long term. The observation although does not mean that the gambler cannot hit the jackpot nor that the trader will enjoy positive returns all through. It means that overtime the odds tend to favor the trader and not the gambler.
Traders numerous options to prevent total loss of risked capital. The trader can opt to set “stop losses” on the stock investment as a simple way to avoid unnecessary losses. For example, if the invested stock drops 10% below its purchase price, they have the option of selling it to someone else and retaining 90% of the risk capital, however when a bet is lost the risk capital is lost completely with no way of mitigation. It is important also to take note of the point spread: If the team betted on does not win by the earlier selected merits, even though it has won, the bet is lost.
The concept of time factor is another key difference between the gamblers and the traders. Gambling on one hand is a time bound event, while trading can stretch over a relatively long period of time. It is important to note that with gambling once the game is over, the opportunity to profit from the placed wager is gone. Trading on the other hand has proved to be time rewarding. Traders who purchase shares in companies are eligible to dividends that can be very rewarding over a long period of time. These companies are bound by law to pay them dividends regardless of what happens to their risk capital, as long as they are traders holding on to their stock.
Information is very valuable when it comes to both trading and gambling activities. This data collected through research improve both their chances in making profitable moves. There exists a difference in the availability of information for the two parties. Stock information for the trader is made public and is easily accessible unlike that information required by a gambler to make an informed decision. The earnings of the company, the management of resources and such like relevant information can be researched and studied by a trader before committing to an investment. For a gambler it is very difficult to obtain information on current performances and in many cases that information is confidential and unreachable.
From a moral standpoint and according to many societies, money earned via gambling is deemed filthy, although this is just but an opinion. There are moreover mannerisms attached to gambling that have led the activity to be frowned upon by many and even in some cases has led to its ban. Gambling has been known to lead to its addiction and this occurs when an individual continues to gamble despite negative effects in their finances, mental health and sometimes even their physical health. This addiction involves compulsion to seek gambling to such an extent that it is devastating for the gambler and also on their families. Unlike trading which in many cases is a civil activity gambling can turn ugly in many ways.
Gambling has led in some severe cases to loss of jobs, relationship issues and severe debts as the gambler tries to collect whatever they can that they may fulfill the need to gamble. Here the gambling now is not being carried out as a leisure activity but as a compulsion and dire need. Gambling has also led to cases of mental distress that at times lead to suicide when a great loss is made. For these reasons and many more not mentioned, governments and states have moved to make gambling illegal to safeguard the welfare of citizens and their families. In this regard it is better to invest energy in trading which is much safer than gambling.