What is the difference between stock trading and gambling in a casino?

Across the world, across ages and across cultures making money quickly is considered as gambling.

Here is the definition of Gambling.

“take risky action in the hope of a desired result.”

Here is the 3 part answer.

Part I: Understanding probability pertaining to various professions gambling

I would put it this way. Anything and everything you are doing in the world is gambling.

One needs to understand “The concept of probability” pertaining to various jobs.

1. Entrepreneurial::When Wright brothers flew the first aircraft, they took a chance or they gambled. The chances of failures were very high. But That is not true for Boeing or Airbus now. If they make a plane, chances of them failure is next to nothing.

2. High Tech:: Lot of NASA or ISRO rockets do not take off. Lot of money is lost. (Aren’t they gambling that the rocket will take off and put a satellite in a orbit?)

3. Sales::When a sales executive makes a pitch to sell a product, he is taking a chancethat the consumer will buy the product he is trying to sell. (Isnt it a gamble?)

4. Investor/Mutual Fund Manager/Money Manager:: The age old definition of investor is someone who buys a stock (based on certain calculations) and holds it for years. You can search for failures of investment managers.

5. Salaried Job: One works and delivers the task given to him/her. Reports to a supervisor, takes home the paycheck.

The above examples are of various risk and probabilities. There can be many such examples.

Part 2: Understanding Derivatives instruments and returns

Let me come to derivatives instruments as a tool make lot of money.

Derivatives is nothing but one buying something on leverage. (called a Margin money). You generally need to pay 10-15% of capital to buy/sell derivatives. While so called investment means paying the full amount.

So lets assume if you want to buy stocks worth $20000. There are two ways. 1). You pay the full amount. 2) Use derivatives, pay 15% i.e $3000

a 5% move in the stock will actually give you the same money. $1000. But because the invested capital is less and leveraged, the returns look abnormal.

The catch here is lot of people enter the world of derivative trading, without understanding the nuances of it. The problem occurs when the stock moves 5% against you and you lose $1000. Which is 33.33% of the capital.

Few examples of derivative based trades

1. A road building company received a order to build a 100 km road. (bullish data –probability of stock going up high)

2. A drug/pharma company said that after spending millions of dollars on research, USFDA declined to give license to the company to produce the drug. (bearish data – the stock should go down)

Concept of leverage::You might ask, why should there be leveraged trading allowed at first place. For me the answer is simple. Take Home/Apartment as an asset class. almost All the purchases ar done using leverage. You make 15-20% down-payment and banks pays the rest, which you pay over time.

Part 3: Attaching the notion of making/losing money to gambling

As i said earlier,

Across the world, across ages and across culture making (losing) money quickly is considered as gambling.

Sadly, the closest to this is gambling in casinos, where one can lose lot of money quickly. (Roulette, BlackJack, Poker etc)

But the fact remains, when one is gambling the odds are not in your favor.

But when one takes a trade or invest, he is taking a decision based on the data he has at his disposal.

The best traders/investors are the ones who enter into a position when the probability of success are high. (smaller proportion).

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The traders who do not analyze data before entering a position tend to lose money.