Differences between
Trading, Investing, and Gambling
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.
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.
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