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Day Trading, Investing and Gambling

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5:27 am
June 27, 2013

John Smith


posts 26

Know that day trading isn't investing. Day trading is also not gambling. But the lines between trading, gambling and investing can be thin. You should understand where the difference is. You will be in a better position to follow your trading strategy. You will also make more money. You should avoid the trap of gambling. This way you will be in a better position to preserve your capital.

What is the difference between investing and gambling? It is the risk and return tradeoff. The odds are generally in your favor in investing. However, it does not mean that you will make money. It only means that there is a good chance you will make money if you have done your research well. Some day traders end up gambling.

Investors, traders and gambler have one thing in common that you need to understand. They put some of their money on risk. They hope of getting a return if they are right. You should take trading as a business. You should also know about the potential risk. You should also know about the sources of your potential return. This will make you better off in the long run.

What is your reward? Your reward is that you get fair compensation for the risk you took. What is your risk? Risk is that you won't get the expected return. Risk is the probability of a loss. The riskier something is, the more chances of a loss.

The reason there is a balance between risk and reward is that financial markets like the stock markets and the currency markets are reasonably efficient. This market efficiency means that prices of securities and currencies reflect all known information about the companies and the economy.

Investing is putting your money at risk to make a return. Investing is the basis of modern day capitalism. It is the way that businesses get started, roads get built and the economy grows. Investing is always focused on the long term. In investing, you buy stocks of companies for three to five years at least that are good but have gone out of favor for the time being.

What is trading? Trading is the act of buying and selling securities. Investors also trade but they trade only when they find a good opportunity. They expect that by investing they will give them a good profit in a few years time.

Traders look to take advantage of short term price discrepancies in the markets. Trading keeps markets efficient by creating short term supply and demand that eliminates price discrepancies. Speculation is related to trading.

A gambler puts the money on line in the hopes of getting a profitable payoff if a random event occurs. The probability of that random event occurring is usually very small. The odds are always against the gambler. They are in favor of the house. However, a gambler always believes that the odds can be beaten. He wants to win big.

Always remember, trading is not gambling. Traders who do not give attention to their strategy and its performance can cross over into gambling soon. They view the blips on their computer screen as a game that they can win. Soon they are trading as if they are in a casino with odds as bad as a slot machine. They start making trades based on emotions without any regard to the risk and return. 

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