It’s a common trope on social media and among screenwriters that the stock market is just gambling; that people who invest in the financial markets are speculators, who only get lucky on their trades.
Yet traders will insist that what they are doing is investing, and far from gambling.
But is it? It’s not all that uncommon for traders, even with quite a bit of experience, to have a nagging doubt that successful trading has more to do with luck than with skill.
And in some cases, traders might have gotten lucky or unlucky. How important, really, is luck in this trading thing?
Let’s Get Some Things Straight
Part of the conflation between trading and gambling is to use somewhat loose definitions of the terms. This is especially easy among people who aren’t very interested and therefore informed about the financial markets. So let’s work from some solid definitions to clear up some popular misunderstandings and outright myths.
Gambling: is when you play a game of chance, hoping you will get a bigger return than what you put in. The key words there being “game” and “hoping”.
Investing: is when you buy financial instruments with the expectation of getting a profit. The key words, in this case, are “buy” and “expectation”.
Gambling is a Tax on Those Who Are Bad at Math
Gambling relies primarily on luck and exploits a known psychological quirk in humans where we are willing to give up what seems a small amount of value now, in the hopes that we potentially get a large return in the future.
In fact, this is the basis of the lottery. You buy a ticket for a couple of dollars, in the hopes of making millions.
More importantly, however, is that gambling is a game. It doesn’t generate a product or service, so the total winnings are the sum of all the amounts put in. It’s a zero-sum game.
For someone to make money in gambling, someone else has to lose. And all professional gambling is set up so that the house always wins. In other words, gambling implies the odds are stacked against you, and in the long term, you will always lose money gambling.
Investment Builds Wealth
Investment relies on as careful and accurate prediction of the future as possible.
This is why investors hate uncertainty, and will generally prefer ventures that come as close to guaranteeing a profit over ones that promise lots of money. Investors are acutely aware of risks, and factor them in when considering an activity.
Investments are not a game. They are part of the productive activities of the economy and are designed to build wealth. Companies issue stock to invest in expansion or buy and sell currencies to pay for goods and services.
Investment is therefore decidedly not a zero-sum game. It’s not only possible but rather preferable, that everyone who participates comes out with a net profit. Smart, diligent and hard-working investors are virtually guaranteed to make money in the long term.
In Forex, you can have both investors and gamblers. There are people who get in the market without a clear strategy, hoping to “luck out” and make money.
Those are gamblers. And they typically don’t make money in the long term.
Investors, on the other hand, are the ones who understand the underlying mechanics of currencies. They have a clear strategy, are informed, and try to minimize their risks as much as possible through prudent money management.
And typically, they are the ones who end up being profitable in the long term.