The Hindu Business Line : Trading vs Gambling

He later said that he was not surprised that he lost a lot of money in the market! Trading in the market was like gambling, he said. If you hold a similar view, reconsider. Here is why.

In gambling, the odds are normally stacked against you. Most card games played in casinos have a house advantage. That is, the possibility of you winning against the casino is very small.

Yet, you are willing to bet because the payouts are high. If you are lucky, a bet of Rs 1 lakh could fetch you Rs 20 lakh if the payout is 20-to-one.

You do not buy a stock to test your luck. You buy it only if you expect it to move up. To put it in statistical parlance, you expect a positive outcome from your trading activity.

Note that the outcome itself is uncertain in both trading and gambling — you don't know upfront whether you will win the bet or if the stock will move up.

Yet, trading is different from gambling. How? If you wager on the roulette, you could lose all your bet money. That is not the case with stocks.

Even if you are a naïve trader, you can still recover a reasonable sum of money if the stock declines after you bought it.

Further, you can increase the positive outcome if you employ stop-loss levels. Disciplined traders typically structure their positions in such a way that no losing trade takes out more than 2-5 per cent of their capital. It is such money management rules that differentiate trading from gambling.

(The author is based in Ontario, Canada)

More Stories on : Stock Markets | Simple Economics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page