Is stock trading gambling?
Stock trading is one arena where people think they know the basic premises, but is widely misinterpreted.
There are many things that can go wrong when playing in the stock market, namely losses of huge sums of money. However, stock trading rarely goes so catastrophically wrong – because traders are skilled and experienced in risk management to know when to step away.
As such, those without experience compare trading to gambling because they see both as equally risky when it comes to losing money. But gambling is an entirely different initiative that is based on odds and sometimes sheer luck. Stock trading, on the other hand, is a particular skillset that involves careful planning, expert predictions and ongoing analysis.
So, let’s take a deeper look into the main differences between gambling and stock trading.
What is gambling?
In the UK, players must be at least 18 years old to gamble. This includes walking into a casino, placing bets online or betting at horse races or football matches. There is no guarantee of a win: players hope to gain more money based on odds, but it is an uncertain prediction.
Consistent gambling is a dangerous game. You can quickly lose all of your betting money – and then some. As such, it’s difficult to make consistent gains, let alone build an established career as a gambler. That’s not to say it is impossible – some with talent and luck on their side can make a substantial living playing poker or through betting. Indeed, gambling can be extremely fruitful.
However, gambling is widely considered a ‘zero-sum game’. To win, someone else must lose. Gamblers are also up against unfavourable odds, particularly if a bookmaker is involved, and will expect to see a verdict on their bet in a quick timeframe. For example, the end of a race or football match.
The nature of gambling is also unpredictable. It takes wins and losses in its stride equally and chaotically.
What is stock trading?
Stock trading, on the other hand, is in stark contrast to gambling as it requires skill. It is far more careful as it is not based on the luck of the draw or the outcome of an event.
Gambling and stock trading do share some similarities. For instance, you have to be at least 18 years old to participate and you must weigh up your risk management skills. But, stock trading involves a higher degree of planning and the investor will actually own a small share of the company when buying shares of a stock.
Furthermore, the second key difference to note is that while gamblers may find the odds stacked against them, traders investing in the stock market expect the odds to be stacked in their favour. This is because price fluctuations over a significant period of time do eventually score a healthy profit.
In fact, evidence shows that long-term investing this way is a guaranteed way to build wealth. One study by Barclays Equity Gilt found that British stocks typically return around 5% per year on top of inflation, based on research spanning back as far as 1899.
Though there is certainly a wide margin for error, stock trading is not as risky as gambling.
Where is there risk in stock trading?
Short-term trading is not for the faint-hearted, and this is where risk plays a significant role.
Investing on a short-term basis, like in a 24-hour window, can be somewhat compared to gambling based on the unpredictability and risk involved. Stock markets are well known to be volatile and sudden: the market can move against you in a matter of minutes, hours and days.
As a result, short-term trading is only practiced by trained professionals who have all the experience and understanding to back up their investment moves.
What similarities are there between stock trading and gambling?
Aside from day trading and short-term strategies, there are some other similarities between gambling and trading.
For example, both look at odds and for an angle to manipulate their performance in a bid to pocket significant gains. But while gamblers, especially those who play blackjack and poker, need to study the behaviour of their opponents, investors study historical trading patterns to make an informed prediction on a stock’s price. While the former tactic is used to ‘bluff’ your way to the top and win, the latter is far more concrete and mathematical.
A second similarity that the two share is found in risk. After all, you have to risk your capital in order to gain profits, whether that’s in a casino or in the stock exchange. Both traders and gamblers need to know how much risk they can withstand – and dangers begin to emerge more clearly when gamblers do not have a strong risk tolerance. A major difference here boils down to training: traders are taught all about the psychology of trading and the importance of pulling out when the market moves unfavourably.
Why do stock traders reject gambling?
A reliable, educated and trained stock trader will reject all notions that investing in the stock market is akin to gambling.
In fact, you should steer clear of any investor, broker or trader who equates the trading of stocks to gambling since they are not making educated and calculated decisions. This is a clear sign of someone who lacks professional insight and intelligence in the stock market – no one should be ‘gambling’ their wealth in the stock market as each decision made must be backed up by evidence and well researched.
In short, stock trading is nothing like gambling. It is a long-held and misinformed myth that the two are alike, even though the two do share similar characteristics. But that is to be expected in two mediums that deal with money and risk.
The key to remember is that in order to make gains in the stock market, you just need the right financial trading courses, education and skills, while to win gambling, you need a combination of favourable odds and luck.