The old saying from a person who has lost the majority of his wealth in trading is “Trading is Gambling” but is it so? Or the reality is completely different? There are very few numbers of traders who take positions in forex/indices and buy and sell options. Which is based on thorough knowledge and insights regarding trends, momentum, moving averages, and similar technical analysis. The major difference lies in between the intentions and knowledge of the market. In both gambling and investing, a key principle is to minimize risk while maximizing profits. In investing, traders operate with strict stop loss and avoid big losses while making big gains during major trends. Most retail traders do not do smart trading, but gambling in the market, which is buying and selling without any economic/financial logic.
In long term, rewards appreciate investing. This doesn’t mean that either of them will never face loss or will hit the jackpot. It is just a matter of time, if you keep playing, the odds will be in your favor as an investor and not in your favor as a gambler.
Interpretation in Long Run
In long run, Gambling is injurious to wealth. Systematic investment and patience will be rewarded. Investors and traders have a variety of options to prevent the total loss of risked capital. Setting stop losses on your stock investment is a simple way to avoid undue risk.
Another key difference between the two activities has to do with the concept of time. Gambling is a time-bound event, while an investment in a company can last several years. . ‘If the strategy involves buying and holding, it’s usually investing. If you expect your return immediately, often before settlement day, it’s gambling.’
If we look at the available information in both scenarios, the amount of information available is much higher in Investing as they both will look to the past, study historical performance and current behavior to improve their chances of making a winning move. For example, while gambling in the casino the gambler doesn’t have any information what happened an hour, a day, or a week ago at that particular table, while on the other hand in investing there are years of past data available at public domains so judge, plan and execute a trade.
When emotions take over and caution goes out the window, they are gambling.