Is stock trading analogous to gambling?

For many trading and gambling, are same in theory but are practically different. One is calculative risk-taking and another luck or chance game. But both offer unlimited potential for profit or loss.

stock trading

While trading most people have the will to win. Nevertheless only a few have the will to prepare to win. So, here are some stock trading tips for you.

Analyzing data

Trading in the stock market is not a game of dice, it involves, apart from other things introspecting the past data that is available and analyzing it. In gambling, it is an ultimate win or loss, but in trading, nothing is ultimate, neither the win nor the loss. Companies are in constant competition with each other to provide better services and bring in new products for better utility. This leads to a rise in their stock prices which earn better profits for the firm.

Reasoning, rationality, and logic

Traders want to invest in right stocks and hence constantly seek the latest information about the company. To predict market trends they perform technical and fundamental analysis and calculate things mathematically. They apply reasoning, rationality, and logic to come to the conclusion which stocks to buy and which to sell. Investors on the other hand judge past trades and then plan their strategy. Where to invest, amount to be invested, and for how long should they hold. Gambling is totally different game altogether.

Entering and exiting market

All trades are first carefully analyzed before buying and selling. Traders know at what level they will enter the market and exit before initiating any trade. They follow the strategy that they have made and are disciplined in it. Everyone knows that the market is unpredictable and the wise investor goes in a planned manner rather than playing with odds. It is due to his discipline and patience that he made a good profit. Trading is not winning the one-time jackpot but it can be a regular source of income.

Calculating before buying/selling

Before trading one should know that he/she cannot win each and every trade. Whenever one trades he should have a long-term approach. Before investing the trader should gain as much knowledge about the company as possible. Blindly buying stocks without calculations and analysis is like betting at the poker game without looking at your cards.

Effects of environment

In gambling no outside events affect the outcome, in stocks outside events like a good/bad monsoon, change of political power, change in government rules/regulations, strike etc. affect market movements.

Planning and learning

In gambling, there is a get-rich-quick perspective which is not suitable in the stock market. Traders look for a plan that provides for a learning experience which in due course leads to success. A trader gains experience even when he loses and using this experience he can gain better profits in the future, nothing like this in gambling.

Risk can be managed

In trading, you can incorporate risk management techniques to reduce loss. Risk cannot be managed in gambling, you win or you lose as simple as that. No need for technical and fundamental analysis in gambling.

We perform technical and fundamentals analysis of the company before providing you with any tips or suggestions. We also study other parameters like political climate, change in government rules or regulations, weather conditions (rainfall), inventions or discovery, etc. before coming to any conclusion to buy/sell the shares.

How to minimize your share trading risk?

We can define risk as the possibility of loss or a situation which involves such a possibility. Risk and rewards, in other words, means how much is the risk that we can take against the rewards we will possibly get.

We all know that while trading in the stock market we are taking risk of our money when we are buying/selling shares of any company. We may lose some or most part of our money (if stock prices go south) or we may profit (if stock prices go north). There are many examples that people have lost huge amount and have committed suicide and also have gained huge amount and are leading a luxurious life. A tale of rags to riches and also a tale of riches to rags.

minimize share trading risk

We can control our risk if we play it in a calculated manner.  Along with evaluating pros and cons of a company whose shares we purchase and along with calculating ratios and analyzing trends with facts and figures we should also apply common sense tricks or tips. Usually, successful traders are those who win more number of chances than losing. One has to manage his risk so that he wins more than he loses.

There are certain principals or rules if applied properly and diligently can manage risk more properly. Tilling the scales more towards winning side.

  1. Begin with a small amount. It is better to begin trading with a small amount. It is an amount which you lose will not make any dent in your financial life. In other words one should start trading with a small amount of the total capital one is ready to invest in future. We can call it a rehearsal or trailer of a three-hour film. One should start in such a way that one can bear initial few losses in a row. It is said man proposes and God disposes. So it is not that every thing will go exactly according to your plans. Your risk amount should not be more than 5 percent of your capital invested in a single particular trade.
  1. Always use a stop loss. Always use stop loss as soon as you purchase a share. It helps in minimizing your losses. Say you purchased a certain share at Rs. 100/- and are holding for certain period of time. You can order stop loss at Rs. 90/- (10 % SL). If share prices decrease from 100 to 95 to 90. Once they reach Rs. 90/- you better sell it (taking 10 % as your loss). If your appetite for risk is higher you can go in for 15% SL. It is not wise decision to undertake uncomfortably large risk, especially in the initial stages. It is better not to trade in futures and options as fall in prices can be 15 to 20 percent within a matter of few hours.
  1. Exit script upon mistake. Everyone makes mistakes. So once you realize that you have made a mistake while purchasing a script, it is better that you exit that script as soon as possible. It is not possible to manage your loss. If you think you can manage your loss you will fall more in the loss trap trying to cover your previous loss. If you are using margin money for trading then losses and gain will both be exponential. During loss better not to wait for margin call, and quit.
  1. En-cash bad trades. Certain laggards remain to be laggards no matter what. Good performers do have their bad times or setback but they recover from their set back faster. Once you plan to sell off your bad trades see to it that you sell those shares first which have not performed well for a considerable period of time.
  1. Sometimes cash is better. Usually, when the market is having free fall it is better not to stay traded. Cash in hand is a position one should take if a market is continuously having a downward trend. Once downward trend stabilizes start your purchase. Better to have cash in hand than to lose by trading.