How equity trading is different from gambling - Motilal Oswal
How equity trading is different from gambling - Motilal Oswal

How equity trading is different from gambling..

It is said that in the long run the stock markets may be a weighing machine but in the short run it invariably tends to be a slotting machine. A slotting machine is the kind of gaming machine that you get to see in casinos. That is almost tantamount to equating trading with gambling. Intuitively, that is not entirely wrong. Like gambling, trading is also a game of chance. Like in gambling, it is very difficult to make money in trading consistently. Like in gambling, even in trading your leverage appears to work against you often. Having said that, there are some key differences! Here are some key aspects on the basis of which; trading is grossly different from pure gambling.

Trading is more of facts and figures
As a trader in the equities you are certainly exposed to the vagaries of the market but you also have a database of numbers and data to fall back upon. You can study the volume and price trends in the market. You can also see how the advances / declines are progressing in the market. You know how much of market activity is delivery based and how much is speculative. The advantage of trading on an exchange is that there is a central body like the stock exchange which is transparently disseminating data and conducting trades. You cannot say the same about gambling!

Trading can be don e on scientific fundamentals and technicals
When you gamble, you can initiate your action and then you are at the mercy of the spinning wheel. Of course, expertise can help you a little bit but it is purely a game of chance, at the end of the day. Trading has a body of knowledge and science that supports. You have a fundamental approach where you look at data and news flows before trading. You also have technicals wherein you can use charts, trends and patterns for trading decisions. When it comes to gambling, you do not have access to such scientifically proven methods. That substantially enhances your risk as a gambler.

There is no house advantage in trading, unlike gambling
This is a slightly more complex point. When you are gambling at a casino, it is the casino that is the counter party. Therefore the casino is an interested party as they need to ensure that you do not make so much money that you bring the house down. That is one of the reasons why you find it so difficult to make money in gambling. On the contrary, the stock exchange is not an interested party in your trades and just facilitates the execution. Hence the exchange is indifferent to whether you make money or you lose money in your trades as long as it does not impact your solvency.

Slower profits versus quicker profits
We all know the famous analogy of the gambler who goes to Las Vegas and makes a stunning profit on the first day. On the second day he makes a small loss and the tries to gamble more to recover the loss. In the process, he ends up losing all the profits made by him on the first day and more. That, in a way, describes gambling. Profits appear to come fast but more often than not they are a mirage. Trading, on the other game, is a game of skill and discipline. The focus is more on managing your risk and protecting your capital. The profits are, therefore, slower but more sustainable.

Gambling is more like a zero sum game
This is an extension of the previous point. The casino will ensure that gambling is a zero sum game for most of the participants. That is the only way the casino can survive in the long run. Trading need not be a zero sum game as you can be in the money consistently by maintaining certain basic discipline and abiding by some basic rules of trading.

There is less of adrenaline and more of discipline in trading
If you find that the casino is giving you a lot of adrenaline rush, then you are exactly what the casino wants. You are the perfect gambler who will keep committing money till you lose all of it. Most people gamble more for the high stakes, the risk and the addictive adrenaline rush. Trading, on the other hand, is more about being boring and being disciplined. Adrenaline can be a disadvantage in trading as it forces you into irrational decisions. From a psychological point of view, that is a crucial difference between gambling and trading.

Greater control over the outcome in trading
This point, probably, captures the crux of the difference. As a gambler in a casino, you have limited control over the outcomes. You purely try to play by the odds and hope that the cycle of probability will work in your favour. As a trader, you have a lot more control. Discipline is your best defence against market uncertainty. You also have the advantage of thinking with your feet and switching to other options. This wide choice for a trader makes it distinctly different from gambling.
It would be naive to believe that trading and gambling are one and the same. There is a lot more of science, discipline and control over outcomes when it comes to trading. Of course, as a trader do not let the adrenaline rush get the better of you!
 
 

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