Stock Trading vs. Gambling
Is stock trading just gambling? If it is, then should people consider stock trading gambling? We will address this question in this article. We will also go through different aspects of trading stocks and the differences between trading and gambling.
Is Investing in the Stock Market a Gamble?
No! Investing in the stock market is not a gamble, and novice investors should not think of it as gambling. Honestly, considering the stock market a form of gambling is just a myth that television pundits and internet personalities have perpetuated for many years.
While gambling and investing have a few similarities, they are still two different concepts with their own characteristics. If an investor doesn't take purchasing mutual funds or trading stocks seriously and considers it gambling, then they can suffer huge financial losses.
Reasons Why Investing In Stocks Is Not Gambling
Stock Means Ownership
When investing in stocks, an investor should realize that they are buying a portion of the company through the purchase of common stock. Purchasing shares of a company is equal to having a claim on assets, debts and a small percentage of the company's profit.
Too often, investors, especially individual investors, consider buying the company share as trading stocks. These investors forget that they now own a small percentage of the firm. To earn a profit or gain an advantage in stock trading, investors must evaluate their risk tolerance and gauge the firm's profitability and performance.
However, incorrect analysis of the company's short-term and long-term profitability could lead to the stock prices fluctuating on the stock exchange. A company's profitability is constantly changing, and investors use different tools such as technical analysis and stock charts to estimate the company's future earnings.
Savvy investors always determine the company's stock price value and where it will go in the future. The stock price of a company is more volatile in the short term. There are several factors that move the short-term price.
In the long term, the stock of the company is the value of all the profits the firm will make. Even if the company has low profits, it can trade shares because most investors assume the firm will have future earnings. However, eventually, the stock price will represent the true value of the company's stock price.
Difference Between Gambling and Investing
Zero-Sum Game and Perceived Risks
Undoubtedly, both gambling at a casino and investing in the stock market involve risks. In both situations, you need capital, otherwise, you cannot take part. However, where gambling and investing differ is how much risk an individual can tolerate and the risks he has taken on.
Generally, investors are aware of the risks that they are taking when investing in stocks. In fact, an investor might not be willing to gamble at the casino but might want to invest more in stocks. However, this scenario occurs investing has risk-adjusted returns, especially when investors diversify their investment across several assets.
For instance, an investor may invest in stocks whose value may lower temporarily or permanently. This could cause the investor to lock in his losses because the risk involved in the investment can be tolerated.
However, in gambling, you are just betting on events that are random, and there is no way to predict the outcome. You could lose all your money in gambling, and whatever money you invest in gambling carries asymmetrical risks.
Another big difference between gambling and investing in the time horizon. When it comes to gambling, there is a limited time period, after that, you are not allowed to participate. In stock trading, there is often a time period, but it will be of no importance to you if you want to hold onto the stocks for several years.
Also, many firms pay their shareholders dividends, which is a reward for holding stock. While on paper, you can lose money, the company will still pay you dividends. With gambling, you either win or lose the money on the bet you placed. There is no gray area in gambling.
Lastly, stock investing and gambling have another major difference, and that is access to information. Gambling, unlike investing, offers little information, so it is nearly impossible for you to consider the risks.You can pick up a few signs on the table or on an online forum, but you are definitely in an uncertain situation. However, while information is usually available for investing and trading patterns, there is always uncertainty in stock trading.
Is Day Trading a Form of Gambling?
While it may seem that day trading is a form of gambling, to beginners or inexperienced investors, it relies on market signals, which indicate where the stock is heading. Day traders take a risk by investing in stocks during the day so that they gain profit on short-term trades.
Disciplined day traders set strict mitigation rules to protect them from trades that will be done against them. Without these rules, the day trading session will become a lot like gambling.
You invest, taking into consideration the market situation and the price of the shares. You are taking a certain amount of risk because if your prediction of the market situation ends up being right, you gain profit, if you are wrong, you will lose your investment.
However, day traders who are successful don't rely on luck and don't put themselves in risky situations. Experience day traders take calculated risks and look for the perfect opportunity to strike and gain profit.
If the trader can make accurate guesses, and undertake risk management strategies, then he is not gambling, he is playing it smart. However, if there is no effective control in place, then day trading will look a lot like gambling. You may also be wondering if gold is considered gambling or not.
- Is the US Dollar An Inevitable Bubble Waiting to Pop?
- What Caused the Financial Crisis of 2008?
- Gold Vs. Inflation: Factors to Consider
- Why Include Gold Mining Stocks in Your Portfolio?
- Stocks Vs. Forex: The Best Investment For You
Was this resource helpful?
Disclaimer: Content on this website is not intended to be used as financial advice. It is not to be used as a recommendation to buy, sell, or trade an asset that requires a licensed broker. Consult a financial advisor.