Investing, Day Trading and Gambling
Know that day trading isnt investing. Day trading is also not gambling. But the lines between trading, gambling and investing can be thin. You should understand where the difference is. You will be in a better position to follow your trading strategy. You will also make more money. You should avoid the trap of gambling. This way you will be in a better position to preserve your capital.
What is the difference between investing and gambling? It is the risk and return tradeoff. The odds are generally in your favor in investing. However, it does not mean that you will make money. It only means that there is a good chance you will make money if you have done your research well. Some day traders end up gambling.
Investors, traders and gambler have one thing in common. They put some of their money on risk in the hope of getting a return. Remember, trading is a business. You should know about the potential risk. You should also know about the sources of your potential return, the better off you will be.
What is your risk? Your risk is that you wont get the expected return. What is your reward? Your reward is that you get fair compensation for the risk you took. The riskier something is the more frequency a loss will occur. Risk is the probability of a loss.
The reason there is a balance between risk and reward is that markets are reasonably efficient. This efficiency means that prices reflect all known information about the companies and the economy.
What is investing? Investing is the basis of modern day capitalism. Investing is putting your money at risk to make a return. It is the way that businesses get capital and the economy grows. Investing is always focused on the long term like five to ten years. In investing, you buy stocks for five to ten years of companies that are good but have gone out of favor for the time being.
What is trading? It is the act of buying and selling securities and currencies. Investors also trade. But they trade only when they find a good opportunity. They expect that by investing they will get a good profit in a few years time.
Day traders try to take advantage of short term price discrepancies in the markets. Trading keeps markets efficient. Trading creates short term supply and demand that eliminates price discrepancies. Speculation is related to trading.
A gambler puts the money in the hope of getting a payoff if a random event occurs. The probability of that random event occurring is very small. The odds are always against the gambler and in favor of the house. However, a gambler always believes that the odds can be beaten and he can win big.
Trading is not gambling. But traders who are not giving attention to their strategy and its performance can cross over into gambling. They can view the blips on their computer screen as a game. They can start making trades without any regard to the risk and return. Soon they are trading as if they are in a casino with odds as bad as a slot machine.
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