Day trading is a cousin to both investing and gambling, but it is not the same as either. Day trading involves quick reactions to the markets, not a long-term consideration of all the factors that can drive an investment. It works with odds in your favor, or at least that are even, rather than with odds that are against you.
Investing is slow and steady
Investing is the process of putting money at risk in order to get a return. It’s the way that businesses get started, roads get built, and explorations get financed.
Investing is very much focused on the long term. Good investors do a lot of research before committing their money because they know that it will take a long time to see a payoff. Investors often invest in things that are out of favor, because they know that, with time, others will recognize the value and respond in kind.
In contrast to investing, day trading moves fast. Day traders react only to what’s on the screen. There’s no time to do research, and the market is always right when you’re day trading. You don’t have two months or two years to wait for the fundamentals to work out and the rest of Wall Street to see how smart you were. And if you can’t live with that, you shouldn’t be day trading.
Day trading works fast
Trading is the act of buying and selling securities. All investors trade, because they need to buy and sell their investments. But to investors, trading is a rare transaction, and they get more value from finding a good opportunity, buying it cheap, and selling it at a much higher price sometime in the future. But traders are not investors.
Traders look to take advantage of short-term price discrepancies in the market. In general, they don’t take a lot of risk on each trade, so they don’t get a lot of return on each trade, either. Traders act quickly. They look at what the market is telling them and then respond.
They know that many of their trades won’t work out, but as long as more than half work, they’ll be okay. They don’t do a lot of in-depth research on the securities they trade, but they know the normal price and volume patterns well enough that they can recognize potential profit opportunities.
Trading keeps markets efficient because it creates the short-term supply and demand that eliminates small price discrepancies. It also creates a lot of stress for traders, who must react in the here and now. Traders give up the luxury of time in exchange for a quick profit.
Speculation is related to trading in that it often involves short-term transactions. Speculators take risks, assuming a much greater return than may be expected, and a lot of what-ifs may have to be satisfied for the transaction to pay off. Many speculators hedge their risks with other securities, such as options or futures.
Many people think that trading and gambling is pretty much the same thing – thus very risky! Not only is that assumption false. It also acts as a deterrent, keeping people away from the financial markets. Hence those miss the exciting opportunities that trading offers. This article will examine activities, trading and gambling, and shed light on the key differences.
It’s a matter of fact that investing money as a trader or investor always bears a risk. And so does gambling – not surprisingly. Therefore, the misconception lies on the fact that both actions involve the same risk.
Gambling is nothing more than luck
A gambler puts up money in the hopes of a payoff if a random event occurs. The odds are always against the gambler and in favor of the house, but people like to gamble because they like to hope that, if they hit it lucky, their return will be as large as their loss is likely.
Some gamblers believe that the odds can be beaten, but they are wrong. They get excited about the potential for a big win and get caught up in the glamour of the casino, and soon the odds go to work and drain away their stakes.
GAMBLERS might loss to all
Yet examining the strategy of clever investors and traders, it becomes very clear that they have the opportunity to implement risk management strategies. Traders can set stop loss limits in order to well… limit the losses. With gambling it is totally different: One bets on something with a specific amount of money. With that one risks to lose the entire sum of the money with one single bad decision.
TRADING provides ownership
Moreover, trading provides ownership over something, ranging from currencies and commodities to ownership in a company (stocks) to which we can add the concept of time and the pay of dividends. The ownership involved in trading will derive in profits if the price of the stocks goes up. The same occurs when the company is profitable and issues dividends. Although the financial markets have fluctuated over the decades, the general trend has been upwards. Furthermore, one of the key elements is to maintain a diversified portfolio, which would be complicated when betting.
Investing represents ownership
Let’s sum it up: There is a similarity between trading and gambling, which is the fact that both activities involve monetary risk at the hopes of increasing future profits. Nevertheless gambling involves no risk management, whereas investing represents ownership over a product, the possibility to earn dividends from companies and implement several risk management strategies.