Tuesday, April 9, 2013

The difference between gambling and trading

Some people say that Wall Street is one of the biggest casinos on the planet. My response to those people is 'you can make your trade a bet but you cannot trade a bet', after the confusion has settled in - they either keep silent (probably shaking their heads), or ask; what the %#@ are you talking about! Well, the difference between gambling and trading may be that there's no difference at all for someone who's not familiar with the financial markets, after all you're 'betting' on which equity may go up or down in price. In that respect they are right. This is were my 'you can make your trade a bet' analogy comes from. In other words, you can randomly pick a couple of stocks or say; it will 'go up or down' 50% chance I'm right' - in this case you are betting and chances are that you will not be very consistent with this strategy. You might be able to choose a few 'lucky' winners, but to do that again and again? That's probably not going to happen.

The 'you can't trade a bet' means that 'betting' and 'speculation' is something completely different. Analyzing the markets in order to make your investment more profitable (read: higher probability to succeed) is the difference between gambling and trading. In a sense, gambling is a form of investing. After all, the definition of investing is: putting your money toward something in the hopes it will generate a higher return. But seriously, obviously the people that claim that there is no difference between gambling and trading are not well informed about how the financial markets work. They are oblivious to the fact that you can make a living with trading the markets (or at least have a much higher chance to make a consistent return) to the contrary of a casino, where usually the house wins.
The bottom line is that you can generate a consistent income with trading and that's the real difference between gambling and trading. Having a trading plan, mapping out and analyzing each and every single trade takes time and is often difficult to do - a reason why most people would steer away from it. But once you understand and do it a few times you will notice that you will get better and better at it, especially if you are already seriously interested in trading. 
Don't jump into trading as an alternative for gambling, because you will most likely lose. And don't trade because your desperate to make money. As the old tip goes in the trading world; don't trade with money you can't afford to lose.

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