Unlike other, more demystified forms of investing, day trading is still an enigmatic activity, especially among novice investors. And undeniably, some of the core characteristics of day trading are intimately associated with gambling.
But there is a distinct difference between investing and gambling. And although the inexperienced eye might blur the lines, it’s essential to have your facts straight before dabbling into unknown stock territory.
So, is day trading gambling? Let’s find out!
Is Day Trading Gambling?
Plain and simple, no. Day trading is not gambling.
Admittedly, both terms share similarities and imply risk and chance. But asking “is trading gambling” is like asking “is investing gambling.” And it doesn’t take much research to understand how these activities are in entirely different ball parks.
At the crux of it, day trading is the act of buying and selling a security within the same day. Day traders typically hold their stocks for a few hours, although some hold them longer, depending on the market. The main goal of day trading is to generate profits through small, frequent stock volatility and predict whether a stock will rise or fall in a given day.
Gambling, on the other hand, is the act of wagering money on an event with an uncertain outcome. Generally, the goal of gambling is to win money, but there is always the potential for substantial financial loss.
Although you can tell the difference by the definitions, we can’t deny that, on the surface, day trading has features akin to gambling – both involve making quick decisions that could be high-risk and you can always lose more than you’ve bet.
So, let’s talk about investing vs gambling and what differentiates them.
Primarily, the main difference between day trading and gambling is that the former has a strategy and examination process leading up to a purchase, while the latter works only with the available odds.
With day trading, you must have an in-depth understanding of what you’re buying and when you’re buying it. Therefore, traders need to familiarise themselves with the stock’s past performance and estimate whether it can prove to be profitable, which involves extensive research, planning, and analysis.
Gambling, however, is based on luck. Although some gambling games also require strategy, like poker and blackjack, there is still the element of chance lurking about and ready to trump your meticulously crafted plan. Here, especially in slots or roulette, players place bets and hope for the best.
No House Advantage
Another key difference between investing and gambling is that the former has no such thing as a house advantage. As we know, in gambling, the house always has an edge. Consequently, the odds are stacked against you and, over time, the house will always come out on top.
This is because gambling establishments make their money by taking a small percentage of each bet or taking all the funds after everyone loses.
But this doesn’t happen in investing. So, when you buy a stock, you’re buying it from another person at a price set for the market. Although this might mean the seller gains profit, it’s also a direct result of market volatility, i.e. there is no middleman taking a cut.
The approach in investing vs gambling is also a fundamental difference between the two. Namely, when you gamble, you’re mainly driven by emotion – the high of winning and the low of losing.
Here, you’re chasing quick wins and letting emotions dictate your decisions. Although some gamblers think through their decisions rationally, it’s still immensely difficult to rationalise games like slots.
On the other hand, investing is a much more methodical process. Investors base their decisions on research and analysis, and not emotions. So, if investors have their eye on a stock, but that stock is not doing too well on the market, they’ll simply ignore it for the time being and focus their efforts on other, more profitable options.
And even though day traders can have short-term gains, the focus is predominantly on long-term growth, which requires developed logic and reasoning skills.
Slow vs Fast Gains
As most of us know, investing is a slow and steady process. Admittedly, it takes time to research and plan your investments, and it takes even more time for those investments to grow to a considerable profitable amount. Therefore, this venture is not suitable for the impatient, as investors buy and sell stocks in a coordinated manner, and not hastily.
In contrast, gambling is all about quick wins and losses. You place your bet, you either win or lose and then you move on to the next bet. Sometimes, it’s even all or nothing. Here, you don’t wait for your money to grow and you don’t make predictions or calculations on how your money will stack up in the future.
Although we’re not saying that one is better than the other, it would be foolish to ignore the impact both activities have on your financial situation.
In fact, day trading can also cause you to lose a significant amount of money, just more slowly. To mitigate these conditions, novice investors typically opt for penny stocks to gain experience in the market.
On the other hand, gambling can eat your money up fast. So, you should start by playing games more suitable for beginners to get your foot in the door before pulling out the big guns.
We’re sure that the difference between investing and gambling is apparent to you after reading our comprehensive article. Although they may seem similar on the surface, they are quite distinct and sometimes at opposite sides of the profit-making spectrum.
Finally, we’d like to note that we don’t prefer one over the other and we recognise that each has the potential for profit for people with different perspectives and temperaments. Ultimately, it all depends on how you want to make your money and what you enjoy more – investing or gambling.
No, trading stocks isn’t considered gambling because investing follows a whole different set of fundamental rules. Namely, trading involves strategy, while gambling is mostly based on luck.
Fortunately, you can’t get in trouble for day trading, as it’s a completely legal activity. However, you can get in trouble if you engage in illegal activities such as insider trading.
Approximately 10% of day traders are successful and make a profit by trading. Therefore, this means that about 90% are losing money.
Sadly, yes, day trading can easily become an addiction, just like gambling. Generally, it has to do with the excitement triggered after a profit, owing to neurochemicals like dopamine and serotonin.