Trading stocks used to be something only available to an elite, where only a handful of people who had influence, money, and adequate education could participate in the market. However, this all changed when the stock investments and trades went online.
Suddenly, the stock market was open to everyone, and even regular people who are interested in investing can join and make a profit. However, there is a common misconception that stock trading and investing is nothing more than gambling. Today, we wanted to explore this further and explain to you all about why stock trading isn't gambling.
What is gambling?
Let's start by breaking down both concepts. According to a definition on Wikipedia: "Gambling is the wagering of money or something of value (referred to as "the stakes") on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods."
Meanwhile, the dictionary calls it the 'act or practice of risking the loss of something important by taking a chance.'
Basically, when you gamble, you are making a choice when you cannot possibly know the outcome. No one can know how the dice will fall. And, while there are mathematical approaches that deal in probability, this is still extremely imprecise. In the end, gambling is taking a chance while relying on luck.
What is stock trading/investing?
On the other hand, we have stock trading, which is not at all like a dice game. Trading (or investing) involves purchasing the stock at a certain price and then trying to make a profit by selling it when its price rises. It sounds rather simple, and in theory, it is.
Companies compete with one another to get a greater share of the market, make important partnerships, improve their products, come up with new, innovative approaches to problems, develop advanced, new solutions, and more.
Meanwhile, they are constantly being overseen by their shareholders, as well as traders, the authorities, and others.
Therefore, whenever the firm makes an important breakthrough, people expect its stock price to grow, which is why they purchase it. When they estimate that the price has gone high enough, they sell the stock, and the difference they made is their profit.
Stock trading vs gambling: Why trading is NOT gambling
So far, we have seen that both traders and gamblers seem to be taking a chance in the pursuit of earnings. However, there are some important differences between the two approaches that make these two different things.
We said already that gamblers mostly rely on luck. There are some games where skill is needed as well, but even the best of them can lose if they find themselves unlucky.
Traders, on the other hand, rely on the information. They keep track of market behavior, historical data, facts, new developments, and alike. Traders would take a chance from time to time as well, but more often than not, taking a chance results in financial losses.
Traders need to use a calm and calculated approach, to watch for market signals and indicators before making a move, and to learn from their mistakes.
Meanwhile, gambling by playing dice or roulette games cannot really be improved through educating oneself or watching indicators. The dice roll is random, and anything can happen. Meanwhile, nothing in the trading industry happens without reason.
The only question is whether or not you can find a reason and assess how it is going to impact the trading world, and if you can do it quickly enough. After that, all it takes is to react and watch as your earnings grow.
Trading is still risky
Of course, such an approach to gambling means that you have 50:50 chances of winning or losing. Traders can improve their odds without having to cheat, simply by researching, learning, calculating, knowing human psychology, and more.
By trading for a long time, you can develop a sense of the market. You get to start understanding how people think and behave in certain situations, all of which makes you a better trader, as you instinctively know when to invest when to stay out of the trade, and alike.
Even so, trading is still risky, and even the best traders can experience losses. However, if they do, it is because something happened to change the situation, and they made a mistake.
In gambling, you cannot make mistakes — you can only make a call that ended up being the wrong one. However, you never had a chance to learn or figure out what is the right way to go, so your choice had to have been a random one.
As mentioned, there are instances where you can tip the scales in your favor. Horse racing, for example, could be one of the games where you can improve your chances of winning if you are skilled at assessing the strength and durability of horses based on their looks.
But, when it comes to rolling dice, there is not much you can do to win, even with decades of experience behind you.
Traders continue to seek the latest information and know which stocks are the right investment. They require technical analysis, an application of mathematical calculations, knowledge, and understanding of market trends, and all other things mentioned before. Each trade is carefully analyzed and confirmed as the best course of action before it is done.
Trades are, therefore, done as a result of a strategy, and they require knowledge and discipline. Not only that, but traders understand that the market can be unpredictable. This is why they can also secure their funds by using stop-loss and similar functionalities.
Trading is more than winning a jackpot because you made the right move in the right place, at the right time, without having any way of knowing what would happen. Making gains through trading is something you have to work for, while gambling is relying on luck, and hoping that you make a good decision.
Gambling can certainly be fun if you are a risk-taker and not afraid of losing some money. However, if you would rather win it, and do it with greater certainty, then learning the art of trading is definitely the right way to go about it.
Stock trading and gambling may look similar at first glance. Both are rather risky, and they can change your life forever if you make a good call and win a lot of money. However, gambling is just that — winning a random game, and even the best gamblers are professional risk-takers.
Meanwhile, professional traders rely on tons of information, analysis, data, statistics, past performances, future forecasts, current events, rumors, Google trends, company officials' reputations, business plans, roadmaps, and much, much more. As a result, making the right call in trading is more than just luck or a gut feeling — it is a lot of hard work in order for you to take an educated guess, and with enough experience, you can be right most of the time.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.