4/1/2022

Difference Between Gambling And Stock Trading

Day trading is a cousin to both investing and gambling, but it isn’t the same as either. Day trading involves quick reactions to the markets, not a long-term consideration of all the factors that can drive an investment. It works with odds in your favor, or at least that are even, rather than with odds that are against you.

In July 2000, Tom Murkco, the CEO of Investor-Guide.com, published an essay titled “What is the difference between gambling and investing?” While Murkco noted that many aspects of gambling and investing might appear similar, there were several distinct and easily defined differences.
Future Of Sports Gambling: Sosnoff said the average cost to make a $1,000 bet in the stock market is $1 to get in and $1 to get out based on the bid-ask spread.

The difference between trading and gambling may come down to the specific properties, or parameters, of the two. Trading pits individuals against a vast market.

Still, the three activities overlap. Many day traders also invest, and some came to trading after years of watching the markets as an investor. In addition, more than one day trader claims that good poker skills are useful for understanding market psychology, and many day traders can point to a winning trade that was made for no particular reason at all. To help you keep straight the differences between day trading, investing, and gambling, this article explains which is which so that you can better understand what you’re doing when you day trade. After all, you can increase your chances of success if you stick to the business at hand.

Investing is slow and steady

Difference Between Gambling And Stock Trading Halted

Investing is the process of putting money at risk in order to get a return. It’s the raw material of capitalism. It’s the way that businesses get started, roads get built, and explorations get financed. It’s how our economy matches people who have more money than they need, at least during part of their lives, with people who need it in order to grow society’s capabilities.

Investing is heady stuff. And it’s very much focused on the long term. Good investors do a lot of research before committing their money because they know that it will take a long time to see a payoff. That’s okay with them. Investors often invest in things that are out of favor, because they know that, with time, others will recognize the value and respond in kind. In the long run, investing is a positive-sum game; on average, investors will make money, the only question is how much.

One of the best investors of all time is Warren Buffett, chief executive officer of Berkshire Hathaway. His annual letters to shareholders offer great insight and are a great introduction to the work that goes into choosing and managing investments.

What’s the difference between investing and saving? When you save, you take no risk. Your compensation is low; it’s just enough to cover the time value of money. Generally, the return on savings equals inflation and no more. In fact, a lot of banks pay a lot less than the inflation rate on a federally insured savings account, meaning that you’re paying the bank to use your money.

In contrast to investing, day trading moves fast. Day traders react only to what’s on the screen. There’s no time to do research, and the market is always right when you’re day trading. You don’t have two months or two years to wait for the fundamentals to work out and the rest of Wall Street to see how smart you were. You have today. And if you can’t live with that, you shouldn’t be day trading.

Trading works fast

Trading is the act of buying and selling securities. All investors trade, because they need to buy and sell their investments. But to investors, trading is a rare transaction, and they get more value from finding a good opportunity, buying it cheap, and selling it at a much higher price sometime in the future. But traders are not investors.

Traders look to take advantage of short-term price discrepancies in the market. In general, they don’t take a lot of risk on each trade, so they don’t get a lot of return on each trade, either. Traders act quickly. They look at what the market is telling them and then respond. They know that many of their trades won’t work out, but as long as they measure proper risk versus reward, they’ll be okay. They don’t do a lot of in-depth research on the securities they trade, but they know the normal price and volume patterns well enough that they can recognize potential profit opportunities.

Trading keeps markets efficient because it creates the short-term supply and demand that eliminates small price discrepancies. It also creates a lot of stress for traders, who must react in the here and now. Traders give up the luxury of time in exchange for a quick profit.

Speculation is related to trading in that it often involves short-term transactions. Speculators take risks, assuming a much greater return than may be expected, and a lot of what-ifs may have to be satisfied for the transaction to pay off. Many speculators hedge their risks with other securities, such as options or futures.

Gambling is nothing more than luck

A gambler puts up money in the hopes of a payoff if a random event occurs. The odds are always against the gambler and in favor of the house, but people like to gamble because they like to hope that, if they hit it lucky, their return will be as large as their loss is likely. It’s a zero-sum game with one big winner – the house – and a whole bunch of losers.

Some gamblers believe that the odds can be beaten, but they are wrong. (Certain card games are more games of skill than gambling, assuming you can find a casino that plays under standard rules. Yeah, you can count cards when playing blackjack with your friends, but doing so is a lot harder in a professionally run casino.) They get excited about the potential for a big win and get caught up in the glamour of the casino, and soon the odds go to work and drain away their stakes.

There is some evidence that day traders are gamblers. For example, in 2016, some researchers at the University of Adelaide published the paper “Day Traders in South Australia: Similarities and Differences with Traditional Gamblers.” They found that almost 91% of the day traders in their survey were also gamblers, and that 7.6% of those also had a problem with gambling, significantly higher than among people who were not day traders. The authors concluded that many day traders are actually gamblers who have added the financial markets to the games that they play.

Trading is not gambling, but traders who aren’t paying attention to their strategy and its performance can cross over into gambling. They can view the blips on their computer screen as a game. They can start making trades without any regard for the risk and return characteristics. They can start believing that how they do things affects the trade. And pretty soon, they’re using the securities market as a giant casino, using trading techniques that have odds as bad as any slot machine.

If you lose money day trading, you won’t get free drinks or comped tickets to the Celine Dion show in Vegas. See Casino Gambling For Dummies Cheat Sheet.

Today we are going to talk about a topic many traders will deny and it’s important for you to keep on reading, especially if you feel offended or think that this article isn’t about you. This article has the goal to raise awareness of negative behavioral and thought patterns. The concepts highlighted can help you identify patterns that might be holding you back from achieving success in trading.

Many people who call themselves “traders” are operating in a gambling mindset. In the following article we condensed research findings of what defines a gambler and what it means to act in a gambling mindset.

The 4 types of gamblers

Psychology and psychological research distinguish between 4 different types of gamblers:

1) Social gambling occurs when you occasionally meet friends for a limited amount of time. Often, the gambling aspect is not as important as the social component and the bet sizes are limited.

2) In professional gambling, the gamblers limit their bets and discipline plays a very important role.

3) Problem gambling is characterized by pre-occupation (the activity takes up a lot of time), other interests become unimportant, people continue to gamble despite negative experiences, accompanied by a variety of other factors as we will see shortly.

4) Pathological gamblers deny their circumstances, they are over-confident and believe that they are in control; they believe that money will solve all their problems; they are very competitive, restless and get bored easily. Pathological gamblers are often workaholics or binge workers.

The definitions have been borrowed from Psychcentral.com. In the following article, we will focus on the problem and pathological gamblers and highlight the difference between social and professional gambling.

Difference Between Gambling And Stock Trading

Gambling refers to engaging in an activity where the outcome is uncertain and where the protagonist is betting money on specific outcomes.

The problem-gambler checklist

Gamblers get excited by risking (substantial amounts of) money. Money is not as important anymore, but they are after the excitement and the thrill.¹
Gamblers steadily increase the amount they are willing to risk.¹
Gambling and the gambling activity take up a lot of time and become an important role in the life of a gambler (gambling instead of spending time with family, friends and hobbies). ¹
Casual-gamblers often set a loss limit that signals to stop playing. Problem-gamblers do not stop when they lose money, but they try to recover their losses. ¹
Problem-gamblers increase the bet size to recover from losses faster. A behavior called “chasing”. ²
Bragging about wins, but not talking about losses. ²
Experience mood swings – problem-gamblers feel good when winning and down when losing. ²
Lying or secretive behavior to cover up their gambling and the amount of their gambling. ²
Gambling with money they can’t afford to lose. ³
People have problems focusing on anything else, but gambling. ³
Denying that they are problem or pathologic-gamblers. ³

Is Stock Trading Gambling

It becomes obvious very fast why problem-gamblers should stay away from taking risks or work on their mental game – preferably by consulting professional help. If you find yourself among the descriptions above, we urge you to take a break from trading and re-think what you are doing.

Traits of a professional gambler/trader/ risk-taker

There are a few character traits and mindset-qualities that stand out for the professional gambler ³:

The act of gambling and when to bet money is planned and based on methodical principles
A high level of discipline and the absence of impulsive decision-making
Does not chase losses
Professional gamblers can evolve into problem or pathological gamblers

Difference Between Gambling And Stock Trading Broker

Further reading: In an earlier article we talked about the broker and other related research findings which observed the trading behavior of different segments of traders. The researchers identified the traders who are most likely to lose all their money and also uncovered some of the reasons behind acting within a gambling mindset.

How To Play The Stock Market

References

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