There’s a perception among many people that trading stocks and gambling have a lot in common, but is this the case? Here, we look at playing casino games and financial trading to unpack the similarities and differences between the two.
All eyes on Wall Street
During January 2021, you more than likely saw media organizations covering an interesting situation taking place on Wall Street. Independently operating informal traders – members of the WallStreetBets subreddit (a community forum on Reddit where participants discuss stock and option trading) – were snatching up GameStop stock. This story caused such a stir in the financial markets that it became headline news. Naturally, this has brought many more people’s attention to the subject of financial trading, but many people still believe that buying and selling stock on Wall Street is little more than gambling.
Let’s take a closer look to see if this is true.
What is stock trading?
Stock trading is a type of investing and refers to the buying and selling of shares in companies on the stock market. There are different types of trades when it comes to dealing with stock. These are:
- Scalping – When a trader attempts to make very quick trades to take advantage of any small price change. These traders aim to make money by making as many trades as possible in a single day.
- Day trading – Day trading takes the scalping concept a bit further and extends the period of trading and profit-making to a single day before the market closes.
- Momentum trading – A trader might attempt to make money by purchasing large amounts of stock that they believe will significantly increase or decrease in value.
- Swing trading – If you’re a trader looking to make short-term gains that take place over a few days, then you might be interested in swing trades. These are trades that require the individual to assess potential short-term growth and invest accordingly to make a profit.
- Position trading – Unlike the previous trades, this type of trade is considered with the very long-term changes in the value of the stock – we’re talking in the region of weeks or months.
The Investopedia article, “Are you investing or gambling?” highlights that some investors can be gamblers on the stock market, referring to the gambling tendencies they have when trading. Two examples of these tendencies are making a trade to get an emotional high (or low) or getting involved in trading or a specific trade due to social pressure.
What is gambling?
Gambling, on the other hand, refers to the wagering of money – or another item – on a game, with the desired outcome being to make a profit or some other sort of gain. Common examples of this would be casino slot games and table games, but this definition also applies to more than just playing at online casinos for real money. Any informal games involving cash bets also fall under this definition, even if it’s just a private poker game among friends or people betting on dice in a streetside game.
However, it’s important to note that some definitions, such as that of Britannica, have more than just “games” in their definition and include “contests and uncertain events,” too. The inclusion of “uncertain events” likely leads people to associate certain elements of investing and financial trading with gambling.
But what are the similarities and differences?
The similarities between gambling and financial trading
- The gambler and trader are both aiming to make a profit, but there’s no guarantee of a return – Regardless of whether the gambler or investor “wins or loses,” they both aim to see a return on their spend.
- Both involve the calculation of risk – Both trading and gambling are about assessing the risk involved and deciding if you want to “play,” even if the overall risk is higher with gambling in most cases.
The differences between gambling and financial trading
- Gambling outcomes happen on a much shorter timescale – While you may be able to place bets on certain events or games months in advance, whether you win or lose is generally decided within a few minutes or hours. When it comes to trading, there are many options, and you may wait weeks, months, or even years to see the result of your investment.
- Other traders can directly influence the “stock market game” – While market manipulation is illegal, that doesn’t mean other traders influence the stock market. This can be demonstrated by what happened with WallStreetBets and the GameStop stock: Big hedge funds that had been planning to short the stock lost out when lots of informal traders communicating on a social media network decided to buy up all the GameStop stock they could get their hands on.
By contrast, in many forms of gambling, other players don’t have any direct influence on the game itself. For example, in a game of poker, you can try to read a player or bluff your way to a win. While these two actions can influence the outcome of the game, it doesn’t affect the game itself – you still have certain cards and those cards won’t change in value or worth. Another way of thinking of this is that when you are trying to guess what a player is thinking, or bluff to influence an opponent’s decision in a game, you’re playing the player, not the game itself (although some people may argue that poker is indeed more about playing the player than the cards).
- In gambling, every individual bet that’s lost is completely lost – While in trading, you might lose a lot of money on a bad trade, it is far less common (but not impossible) that a bad trade will leave you with absolutely nothing. If you lose a bet when you gamble, however, you’ve lost everything you placed on the wager.
- Gambling is always about luck, even in games where skill can affect your odds of winning – In trading, there’s room for analysis to improve your chances of turning a profit. In gambling, even in the games with the lowest house edge, luck plays a much greater role in deciding how your bet will turn out.
- There are many external factors that can influence whether you win or lose in investing, while this is not the case in legitimate gambling – When you place a bet, there aren’t external factors that will affect whether you win or lose the game. The bet exists entirely in the world of the game. However, many external factors can affect the value of stocks. For example, if a major flaw with a product is discovered, which causes it to malfunction, your related stocks are likely to collapse in value. Similarly, if a CEO or other high-ranking individual in a company is caught up in a scandal, this might also cause the stock value to drop.
It all comes down to risk
While we have no doubt that the comparison of stock trading and gambling will continue for many years to come, our thoughts are that, on balance, they have more differences than they do similarities. Yes, they both involve people taking risks to make gains, but ultimately there are so many other factors that set the two apart.
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