Investing into the stock market can be a daunting task. It’s the ultimate job that everyone aspires to be good at; you use large sums of money to make larger sums of money. A good stock trader can make a potentially infinite amount of income, but that’s only after a lot of failures and trials. Let’s be honest, not everyone is cut out to be a stock trader, and it’s not just a case of trying until you get it right.
One of the most off-putting myths about stock trading is that it’s close to gambling. After all, you’re using money and risking it to make more money—that’s no different than playing poker at the casino. However, it’s a common misconception that just isn’t true. To help demystify this belief, here are the key differences between a gambler and a stock trader. If you want more information, visit The Fortunate Investor for more detailed articles.
Expectations on Return
When you gamble against the house in a game of Blackjack or the slot machines, you’re expected to lose money so the casino actually makes a profit. All games are weighted in favour of the house, so over a long period of time, you’re going to lose more money than you invested, even if you’re really good at certain games. You’re essentially paying a casino so that you can experience the thrills of a risky environment.
With stock trading, there’s no such thing as weighted odds because you aren’t playing against the house. Every decision you make is entirely yours, and the only luck involved is through market anomalies that are hard to predict. If you’re smart about trading, then you will always make a positive amount of money.
When you gamble, your bet is final and there are very few games where you can minimise your losses. When you play Poker, the goal is to minimise losses and play aggressively when you have a good hand. Poker is somewhat similar to trading stocks in that you have the ability to invest in favourable situations, and you can back out of bad situations. But other gambling games don’t follow the same structure as Poker.
If you place a bet on a sporting game, then there’s no way to get money back or reduce that loss. With stocks, however, you can pull out and stop your losses whenever you feel like you’re in an unfavourable situation. Imagine if you could change your bet once a sporting game reached half-time. You could pull out if it’s clear you’ll lose the bet, or you could increase the bet if you think you’ll win. That’s what trading stocks is like—you can dynamically change your “bet” to work with the current situation.
Gambling is restricted by time. You make your bets and then the outcome resolves itself in a couple of minutes or over the course of a sporting game. It’s fast and furious, and you have to make decisions on the fly and account for all the possibilities within a short time span.
With investing, the outcome doesn’t resolve itself instantly and it could be argued that until the company is sold or goes bankrupt, it never has an “outcome”. Profits can rise and fall with businesses, so it’s a long and slow process that demands a lot of attention just like gambling.