Is trading gambling? - the distinction is very subjective with several shades of grey, and in my opinion, is more a stasis of connotation rather than any difference in the underlying activity.
Pick one:
If you were not a gambler and felt that gambling was not trading which one would you pick?
If these are your only choices as a trader, then you're not trading.
It all depends on your definition and perception of gambling. Based on this definition, can you think of anyone who has made money without taking some sort of a gamble?
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Will buying an investment property to flip it and sell it for a profit a gamble? Aren't there adverse possibilities in the odds for or against that profit?
How about driving a truck for a living? Is that a gamble? You can quantify the probability of an accident and mortality rates - So does that mean that driving is a gamble?
How about starting a business? If you are not 100% guaranteed success and a positive outcome, then you must be gambling. Right?
The word gambling has the same taste in people's mouths as the word greed. They are both facts of life except when pursued recklessly and in excess.
As with everything, the truth can only found in somewhere in shades of gray, and while it may be argued that all transactions which involve derivative instruments are gambling by definition it is possible that you have found at least one way to trade that isn't gambling as most people think of the term.
Trading would not be gambling if you were a farmer of some sort and took a position in agricultural futures to offset your current product, the same could be said if you were a jeweler and metals worker and took a position in the metals market, or were in the business of lending money and decided to hedge a portfolio of loans with an interest rate derivative...etc.., etc.
But all trading involves risks, and your trading model would have to factor all of them out of the equation to really be considered not gambling, and if it does effectively eliminate risk to the point where it is pretty much non-existent, well then for you trading is not gambling.
And I'd say that for over 90% of the trading community (including those that use all aforementioned derivatives, options, and the purchase of stocks for the purpose of short-term capital growth), no matter how good their trading is, it is still gambling.
However, I'd also say that any trader who readily accepts unknown outcomes, whether he calls it gambling or not, is far better off than the trader who is so stubbornly sure of his views or methods that he feels insulted by being called a "gambler". Beyond that, it's a matter of semantics.
It's one of those irregular verbs:
I invest
You speculate
He gambles
A gamble is simply a game with a random outcome. Buying a stock whose return you do not know is a bet that the stock's return will reward you for the risk, and also hedges the "financial risk" of the market growing faster than your wealth (basically locking in your proportion of the world's wealth in some statistical way).
While the trader would like to think the odds in finance are in their favor, the whole concept of probability in finance is a concept modelers posit on the markets to try to make sense of outcomes they can't predict. While we would all agree that the more time a pair of dice are rolled that 1/6 of the rolls will sum to 7, few of us would make any similar statement about the returns of the S&P. In fact, many would have said that the odds were against the buyer in late 1999 and early 2000.
2 years ago, after I repeatedly placed in the first 200 in the daily, weekly and monthly rankings in VSX (virtualstockexchange), amongst over 200,000 other players, I got 'adopted' into a community of absolute ace elite traders.
But, seriously, the first thing they taught me was actually a gambling system, since this was their idea of introducing me to the reality of trading. This was their way of saying "money management is everything".
Next thing I knew was: They were right.
Gambling is very similar to trading in this way and you can learn a lot about advanced money management from successful pro gamblers. Pro gamblers have similar behavior to pro traders, and loser traders have similar behavior to amateur gamblers (those guys who feed slots or play roulette or whatever hoping they'll make some money) What you really learn, though, is the fact that money management is everything. Throw away prediction bla bla you don't even need it - You can roll a die to determine whether to go long or short, and given you cut your losses and run your gains, you'll make money.
Another thing to consider is the reason you are doing the individual gamble or trade? If you're after the thrill or rush that comes from being in the moment, with the chance of an outcome in your favor, which excites you, I'd say you're gambling. Though there are excellent gamblers who understand risk, and have the discipline to cut losses, in order to be able to continue to play the game or another one, and not for the thrill of it.
What is it that we seek from the outcome? For some it's the process, the end result is a $ figure. In gambling on any one hand or pull of the handle, or roll of the dice, or spin of the wheel, what you place is gone should you be wrong. In a trade, one does have the option of exiting with only a partial loss, do we not? Exercising that option though is another matter. Of course neither gamblers nor traders should ever bet the wad at one time, but it happens.
The whole idea of trading is that it increases happiness in some way for both parties. When I go to the bar and get a martini, the bartender is happy to have my sawbuck, and I am happy with my Bombay Sapphire and blue-cheese stuffed olives. Similarly, when I go to a craps table and bet the don't pass/don't come; I am trading an expected loss for casino entertainment, free drinks, and the right to gloat when a "7" is rolled.
It is sometimes said that in gambling the rules of the game are defined, i.e. there's no model risk. Not so in asset pricing, and hence in trading...
This is why gambling can be considered as a simple model of the market where all models are true models. So if you don't understand the gambling rules/risk/models - then don't think about trading too. I met so many situations when people are talking about very sophisticated models, measures,...etc and cannot solve the simplest probability riddle from the gambling world.
Trading actually has a downside in relation to casino gambling in one limited respect. In the casino, you can essentially determine the exact probability of the outcome, although that probability may not be in your favor. On the other hand, there is no such clear probability distribution when trading the markets. The markets are shrouded in uncertainty, that less attractive and numerically indeterminate cousin of probability. I believe that anyone who thinks he is trading the markets with numeric specificity is kidding himself. What some traders view as the probability distribution of possible outcomes on future trades is only a statistical distribution of past trades which may or may not only have a nodding acquaintance with future performance. (Consider overly tight curve fitting as an extreme example in this regard). While the markets may approximately repeat themselves from time to time and while some trading methods may be fairly reliable, they lack actual numeric certitude in respect of future performance. At best, I think that the trader can go with "the balance of probability," which is more of a bias than anything else.
Is Poker gambling? I think not. If you are a skilled player, poker is a form of investing because you put money at risk with the rational expectation of earning a return. There is one factor which can change either poker or day trading from investment to gambling: COSTS.
For example, casinos that sponsor poker games collect a fee from every player for every hand that is played. If this fee were large enough in relation to the amount of money being wagered, then even though any player might still hope to win by luck, even the most skilled player would not rationally expect to win. The costs turn poker into gambling.
The impact of costs on day-trading are not trivial. Today's on-line trading commissions are indeed low, but as a day trader you might trade dozens of times every day -- and every time you trade you rack up another commission cost. If the cumulative commission costs are greater than what you can rationally expect to earn from your day trading skill, then you are gambling -- you're just hoping to get lucky beyond your skills and overcome the costs. That means that part of the skill of a good day trader is to control costs, to only execute the trades that really need to be made and avoid the ones that don't really matter.
Gambling is that activity where the probability of success is determined by the rule of the game. For example if you play a slot machine, the probability of success is absolutely determined by those combinations chosen as winning combinations against those chosen as losing ones. As it turns out, the house sets the rules so that it always has the probability slightly offset to its advantage so that the gambler is ultimately doomed in the long run.
Gambling also involves using research, skill and knowledge to predict the out come of a sporting event. Slot machines are one extreme of gambling indulged in by people who can't think, similar to a share purchaser who runs out and buys a share because a guy in the pub tells him it a good idea. There is a large spectrum of gambling as there is in share buying.
Investing is where the investor chooses the probability of success through his choice of investment and balance of risk verses reward...etc.
Change the word investing to gambling, on events etc, and the meaning is the same. There is a low risk no lose gambling technique called arbitrage where you bet on all the outcomes of an event. By selecting the correct odds from differing sources you can place a bet such that you cannot lose.
The returns are low and the choice of investment involves a lot of research. The risk is negligible and thereby the reward is low as well.
Gambling is the same as shares. You put money into something in the hope of above average return in exchange for risk. Betting on the Grand National is similar to buying a newly AIM listed gold prospector mining company buying Lloyds is similar to betting on New Zealand versus Japan at rugby.
Perhaps one of the real distinctions between gambling and trading is that a successful trader will be given more opportunities to trade, however a successful gambler will find that other participants in his market decline to gamble with him!
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