Calculated financial risk versus gambling

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The problem with gambling in the stock market is it reduces your chance of success

There is a fine line between trading and gambling. Do you know the difference?

When you are trading in the stock market you are taking a financial risk. You weigh the odds of losing a predetermined amount versus the odds of winning. If the odds are in your favor then you trade the stock. 

financial risk dice stock market

When you bet, generally you either win or lose. If you place a wager of $1,000 at the table in Las Vegas or on a horse and you lose, you lose $1,000.

When trading properly, prior to placing a trade, you should have identified your exit strategy. This will be a price at which you will exit the trade if it goes against you. This can be done by either making a mental note of the price you will get out at or by entering a stop loss order. A stop loss order is a price where the stockbroker will automatically sell your stock if the price is reached.

If you buy 100 shares of a $10 stock, it will cost you a $1,000. If you set a sell price below $9.50 and the stock goes against you and your stop is hit, you will have $950 minus say $50 in commission or $900 left. In this case you lost but still have 90% of your capital versus 0% when you bet.

Since all traders are betting that the stock they buy is going to go in their favor, one could generalize and say all traders are gamblers.

There is nothing the average trader can do to influence the direction of a stock. If you cannot influence the direction the stock takes, then you are betting on the direction.

Use proper money management techniques and turn your wager into a trade.

If you think you are gambling on too many of your trades you may want to read some of the books summarized in our self-help section which may help you with this problem.

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