- Who is a gambler?
- Who is a trader?
- Trading and gambling
- What have we learnt?
- What we expect from you?
Who is a Gambler?
A gambler is a person that wagers money or anything of value i.e. puts it at stake, on an event that has an uncertain outcome. The gambler hopes to win something out of this activity by taking a chance on the event.
In gambling, there is always some risk that is involved. Whenever a gambler puts his money or any other valuable item at stake, he is taking a risk. While he takes this risk, he hopes to win something in return that will make his activity of taking a risk and betting on an outcome, worthwhile.
Gamblers will put their money on the chance of an event taking place. The outcome of this event may depend on chance or accident alone. Gambling activities involve betting on the roll of a dice or a roulette wheel, or in games like poker or blackjack, or betting on the result or outcomes of matches played in the various sports, or even in lottery. This is not an exhaustive list of gambling activities, everything can be gambled upon, this is the basic essence of gambling.
Hence in gambling, there is a stake i.e. money or anything else put on the line, there is risk i.e. uncertainty over outcome of the event, and there is a prize that the gambler will win if he if predicted the outcome of the event right
In the most general sense, a trader is a person that buys and sells goods with the hope of making a profit in this process. In today’s time almost every person has traded something or the other at some point in life.
In the financial sense, a trader is a person that buys and sells a financial product or an asset on the financial market. They could engage in this activity for themselves or on behalf of an institution.
The activity of trading is driven by profits, like any other activity. A trader will acquire stocks, commodities, derivatives, currencies, bonds etc, and then trade it in return for a profit. Financial trading is mainly of two types, speculative and arbitrage.
In speculative trading, a trader will either buy or sell a financial asset i.e. take a long or short position in it expecting the price or value of the asset to rise or decline respectively. The trader can square off the positions i.e. sell or buy it accordingly and either book a profit or incur a loss.
Arbitrage is the practice of taking advantage of price difference of the same financial asset in two different markets. In this the trader will look to buy the asset from the market where its price is lower and then sell it in the market where the price of the same asset is higher.
In trading there is always a risk involved. And for every risk taken, the trader will hope to earn a profit. Hence in trading too, there money put on the line i.e. for acquiring the financial asset, risk is involved as the price of the asset can increase or decrease, and a prize is involved wherein if the trader correctly forecasted the price movement, he stands to earn a profit on the trade.
We have discussed about what gambling and trading is and have seen that both involved stake, risk and a prize. But does this make trading and gambling the same? There is a difference in the two with respect to the approach a gambler takes towards gambling and that the trader takes towards trading.
Whenever a person takes a plain bet on the outcome of an event solely relying on luck or chance, he is said to perform the act of gambling. For instance, a person betting on the roll of dice to show a particular number is completely gambling.
This is the point where trading as a profession is widely looked down upon. Whenever a trader bets on the outcome that the price or value of a financial asset to increase or decrease, he is said to perform the act of gambling. The sole thing that differentiates gambling from trading is the ‘why’ factor. Why does the trader think that the price of the asset will increase or decrease?
If the trader does not have an answer to the question, then it is plain gambling as there is no rationale behind the trade and the outcome is based on luck or chance. But if the trader has a genuine rationale for the trade and knows why the price of the asset will experience a change, then is something we like to call as organized speculation.
It is a commonly known fact that every game that is present and functioning inside a casino has its odds titled towards the casino or the house. The casino runs these games with odds in their favour, in the short term they will lose money but in the long term, their odds will play out and they will always be profitable.
This is another difference between a pure gambler and a trader that is involved in organized speculation. A gambler thinks that the odds of him winning or losing is 50-50 but in reality all games are not built with only 2 outcomes with equal odds. Hence, the odds are stacked against the gambler and in the short term he may win and earn money but if spread over the long term, the gambler will lose money.
A trader that indulges in organized speculation knows about the odds that are in his favor in the trades he takes. These types of traders will have a proper rationale behind the trade which is based on some sort of analysis that they perform before committing to the trade.
Such traders thus have a trading plan in place which gives them the ‘why’ of the trade. The traders with sound trading plans know beforehand at which price they are to enter into the position, at which price level will they look to exit and book a profit, as well as at which price level they must exit the position in order to limit their loss in case the price moves against them.
Gamblers are often people that indulge in the activity of gambling in order to earn profits and get rich over a short period of time. This mentality when applied to all walks of life will lead to failure in the long term.
A good trader will know that small profits will lead to big profits in the long term and that he must keep his psychology and emotions in check and let his odds play out.
Therefore, a proper trade plan along with sound risk management and appropriate psychology is what differentiates trading from gambling.
What have we learnt?
We have discussed about the characteristics of trading and gambling and have seen that there are some similarities between the two. But these similarities do not dictate the narrative as the thing that differentiates between the two is what allows a trader to flourish over a gambler.
A trader is not a gambler when he indulges in organized speculation, where he enters into trade based on a trading plan after having an analysis on the asset, managing risk properly and maintaining his psychology all along the way.
It should be noted that the way traders do certain things in order to drastically improve the probabilities of the trade going in their favour, gamblers too take many such measures in order to improve their odds in order to win, but this is a separate topic for another day which does not apply to us.
What we expect from you?
Since we have been trading the financial markets since some time now, we have been coming across such questions every now and then and we were of the opinion that the air must be cleared on such topics, hence this blogpost.
If have been asked such questions or have been a part of discussions on such notions then go ahead and share any arguments that you have heard in favour of or against this. Even if you have any personal opinions on it then let us know through the comments section and we can always have fruitful and constructive interaction.
We always welcome questions and suggestions from our readers and urge readers to mention anything that they would want to convey to us without hesitations. We will make sure to revert.