Is trading a form of gambling? Key similarities and differences
Stock trading and gambling have many things in common. However, in spite of their differences, some people would still argue that they are, in fact, the same thing. Could trading really be considered a form of gambling? Let’s see what these two have in common and what sets them apart!
How gambling and the stock market are similar
If you look at the dictionary and the Wikipedia definitions of gambling, you will see it sounds a lot like trading. Gambling basically means an activity where someone places a bet on an uncertain outcome. When trading stocks, you risk an amount of money that is not predefined at first on an event that has an uncertain outcome. The goal is to make more money, but the amount is also unknown.
However, if this perspective could be up for discussion, here are some undeniable similarities between gambling and investing in stocks:
- Exposure to risk – gambling and investing are risky activities, as they involve using an amount of money to gain value without knowing if you will gain a profit, lose the entire amount, or only lose some of it. In both activities, participants have to know their risk tolerance. This means they should always be aware of how much they are able and willing to lose and how far they can go with it. Not knowing when to stop can leave you empty-handed in both situations;
- Developing strategies – while most casino games solely involve luck and no strategy can be applied to them, the classic table games bring the salt and pepper of this activity. In games such as Poker, Roulette, and Blackjack, players can develop their own strategies over time and increase their odds to win. The same goes for trading, as investors study charts and use their experience and knowledge to predict a stock’s future price. The information is readily available from trustworthy authorities such as the SEC (Security and Exchange Commission), making it easier for traders to have a genuine image of the stock market’s present situation and predict a potential future;
- The element of luck – even with a good strategy, both gamblers and traders can have bad luck. Both their activities also rely on luck, and they have to manage the good and bad luck as it comes in order to keep going and potentially reach their goals;
- A means to make fast money – day trading is in many ways similar to gambling, as it only relies on luck, and many transactions are performed on the same day. This happens when a gambler plays a slot machine and makes multiple bets hoping for a good outcome.
What makes trading different from gambling
There are many differences between trading and gambling, and this is why most investors do not consider themselves to be gamblers. Here are the main things that separate this activity from playing at a casino:
- It’s based on facts and figures – traders are constantly analyzing stock charts and studying a variety of parameters and price trends to determine if they should invest in a stock or not. This is especially true for long-term trading. Meanwhile, gamblers have no facts to rely on, and even if a few strategies are based on mathematics, they are still not guaranteed to work;
- Ownership and the time factor – if you invest in a company’s stocks, you own them, unlike gambling, in which there is nothing for you to own. Because you own the stocks, you may profit from them when you desire and when you decide it is best. You can do that by selling them when they have reached the value you have expected, or you can keep them and receive dividends if the company pays them. This is a steady income as such companies will continue to pay dividends for as long as you hold onto the stock;
- Does not have a house edge – the house edge in gambling shows how much the house will keep from the money you gamble on the long term. The saying “the house always wins” is true, and the player can only be at an advantage if they know when to stop. Investors do not have to deal with a house edge. While the casino itself is the counterparty of the gambler and only one of the two can win, in trading, both the investors and the company’s shareholders win when the stock prices rise;
- Provides more control over the capital – when a casino player loses a bet, the entire risked amount is lost. If the bet was C$10 and it was an unlucky one, the entire C$10 are gone from the player’s account. This means that for the next round, they have to set another risk capital. Meanwhile, stock traders can mitigate losses in various ways, and the simplest one is to sell the stock when it drops 10% below the purchase price. This allows them to still keep 90% of the capital they’ve risked and reuse it;
- Offers the opportunity to evolve – you can get better at Poker or Blackjack, but most gambling activities require nothing more from you than a wager. This means that there is nothing you can learn over time that will make you a better player in the future. Spinning the reels of a slot machine or playing the lottery will be the same every time. Investors learn from their mistakes, and the veteran ones are more successful because they acquired the skills they need to make it.
Gambling and stocks trading – which one is better?
Now that you know the significant similarities and differences between gambling and stock trading, you might wonder which one is better. There is no correct answer here, and it all depends on what you are looking forward to doing. If you are looking for a fun way to spend your time that may also bring you extra money, gambling might be the one for you. However, if you want to get serious and continuously increase your income by spending time analyzing and trading, you might want to be an investor.
As you can see, trading is not fun like gambling is. It requires a lot of your time, attention, analytical thinking, and all you will be doing is be alone at a computer buying and selling stock all day. There is no adrenaline involved because all decisions should be made after research, not at random. Therefore, if you were looking for a more entertaining activity, trading is not the one for you.
Can stock trading become addictive?
There is a form of addictive-like behaviour that is a subset of gambling disorders, presenting many of the symptoms a gambler shows when they gamble and also when they try to stop doing it. Day traders are more exposed to this than long-term ones because their activity is more similar to gambling, primarily how it affects them. In these cases, the payout intervals are short, allowing them to reinvest immediately. Sustained over a long enough period of time, this can become as addictive as gambling, and the following signs may appear:
- The need to chase losses by reinvesting more money or in more assets;
- Large profits make them think they have all the skills to predict anything in the stock market successfully;
- They start having the illusion of control and might experience something close to the “near miss” concept in gambling, as they begin to believe they almost succeeded despite their obvious losses;
- They become competitive and hungry for social success in the world of traders.
These can reinforce addictive behaviours if overlooked.
Psychologists have conducted studies on this matter and concluded that trading might trigger an addictive-like behaviour for some individuals in certain conditions. Therefore, it is imperative to always pay attention to your own actions and feelings and determine whether the activity, be it gambling or trading, affects you more than it should or on a deeper level. Self-assessment is the first step towards preventing or solving such a problem.
The information in this article has been obtained from the following sources:
- Excessive trading, a gambling disorder in its own right? A case study on a French disordered gamblers cohort
- Is Investing in Stocks Just a Form of Gambling?
- The Similarities Between Day Trading and Gambling
- Is the Stock Market Gambling? Why Trading in the Stock Market Isn’t Gambling
- Going All-In: Investing vs. Gambling
- 7 Reasons The Stock Market Isn’t What Many Think It Is