0 Top 5 differences between Stock trading and gambling

There has been much debate on whether Stock trading is intrinsically gambling or not. On the surface, both of them share certain common features as both involve the attributes of risk and choice.

Ideally, when people refer to the adage- ‘Stock investment is just like gambling in a casino’, people are referring to those involved in the ordeals as Professional traders and recreational gamblers. Furthermore, while there are certain games in which the results don’t just boil down to complete luck, we’re going to focus on Long-term stock investing which has a pay-off period of a minimum of 4 months (as compared to day-trading) versus Blackjack or roulette. This taxonomy has to be kept in mind as we examine these two activities more closely and see if we can point out some of the key differences.

1. Odds in favor and against

The main reason that stock market investing isn't gambling is that you have much better odds of success with the stock market. When you go to the casino the odds work against you, while you can certainly win in the short term if you gamble long enough you will lose.

This is because the house has the advantage of roughly 1.5% in the long term. In cases like Poker, you might strive towards increasing your odds to your favor against your competitors; the house makes sure that they’re in an advantage at the end of the day.

The stock market on the other hand works in completely the opposite way. Over time the stock market will increase therefore the odds are actually working in your favor. That means that while you may lose money in the short term if you stay in it for long enough you should make money. If you are a short term active trader, be sure to check out a listing of Best Brokers for Active Day Trading

2. Stochastic interplay

The other big reason that the stock market isn't gambling is that the results are not random. When you are gambling the results mostly come down to pure chance, the roulette wheel lands on your number or it doesn't. The odds are the same regardless of which number you pick. With the stock market on the other hand well run profitable companies will be rewarded by seeing their stock value increase while poorly run companies will see their value decline.

Stock and company information is readily available for public use. Company earnings, financial ratios and management teams can be studied before committing capital (fundamental analysis). Some stock traders study trading patterns by interpreting stock charts and try to leverage the charts to glean where the stock is going in the future (technical analysis). This means that the odds are not random; you can be successful by choosing the best companies.

3. Long haul and short-run

Another difference between the stock market and gambling is that there is no end of the game with the stock market. When you play blackjack for example if you lose that hand the money is gone, that hand is over. However with the stock market if the value of the stock that you buy declines you still own the stock. If your stock drops 20% below its purchase price, you have the opportunity to sell that stock to someone else and still retain 80% of your risk capital.

This means that if the price goes back up you will regain the money that you lost. This is an important and often overlooked difference. Being able to stay in the game is critical to winning. The following points help to summarize the importance of time frame:

1. Trading activity is ongoing and done as part of a long-term plan whereas gambling is a discrete event or series of discrete events not done as part of a long-term plan.
2. Being able to stay in the game is critical to winning.
3. Some companies actually pay you money in the form of dividends to go along with an ownership stake.

4. The Ethical choice

Any investor would tend to put money in the hands of those with the most promising and productive uses for it, and drives the economy gradually upward. They aren't merely betting on which companies will succeed, they're providing the capital those companies need to accomplish their goals, however small that may be. The U.S.'s leadership position in technology is largely due to investments by venture capital firms and angel investors. Similarly, you can change the world in a small way by investing in companies you believe in, such as socially or environmentally conscious firms and mutual funds, or biotech companies that are working on diseases that might affect you or someone close to you. To read more about social responsibility for investors, please refer to Social Responsibility of Investors

• Note: I should emphasize and add that not all types of investing are productive. Buying and holding results in a positive contribution to the economy, but buying and selling quickly, the way day trading is done, results in no net contribution.

5. Risk averse v/s risk seeking

Risk is the prime feature which makes both of these activities extremely lucrative for amateurs. However, once you step into the game, you begin to realize that gambling is about action and the lure of the big win, and thus it is definitely risk seeking. Now this is in stark contrast with stock investing as an investor would more often than not, be risk averse in his strategy. Some traders typically risk 2-5% of their capital base on any particular trade. Longer-term investors constantly hear the virtues of diversification across different asset classes. This, in essence, is a risk management strategy, and spreading your dollars across different investments will likely help minimize potential losses. As a stock trader you will also have to continuously keep trying to reduce your costs. For the listing of low fee brokers, please look at Low Cost Stock Brokerages

The following example will help understand the key difference once it for all:

Would you rather have $50 or a 50/50 chance at $100? If you take the $50, you're an investor. If you go for all or nothing, you're a gambler. Would you rather put your money under your mattress or in an extremely volatile stock that could go bankrupt or could double in value? If you expect to double your money quickly, whatever you're doing is probably gambling, even if it happens on Wall Street rather than in Las Vegas.

Conclusion:

As we try and conclude the key differences between both, it helps to recognize that it is the attitude of a trader or a gambler that can make all the difference to how his game is perceived by others.

The next time you hear someone say that stock investing is the same as playing in a casino, remind them that in fact there are some similarities and some major differences; both activities involve risk of capital with hopes of future profit. Gambling is typically a short-lived and thus an addictive activity, while stock investing can last a lifetime. A conscious investor will always strive towards minimizing and distributing the risks, while choosing to invest on the companies which turn the odds into his favor than others who do not.

In general, most average investors will do better investing in stocks over a lifetime than trying to win the World Series of Poker.