Is Share Trading Gambling?

Submitted by Marco on 3 May, 2006 - 10:18

Marco tries to Answer Whether or Not Share Trading is Glorified Gambling or a True Profession?

Is share trading a gambling activity? The Australian Pocket Oxford Dictionary defines gambling as to 'play games of chance for money'. It also defines gambling as to 'risk much in the hope of great gain'. Now, old George doesn't think share trading is gambling. In that post, he says, "You used technical indicators to tell you that the balance of probability lies in your court and if it doesn't - well you must quickly initiate risk management and cut losses." A statement that contradicts our dictionary definition. So some people classify share trading as "glorified gambling." Well, if you stick to the genuine definition of gambling, share trading IS gambling. Personally, I was in denial with this for a long time. Every time someone brought up share trading and gambling I would refuse to believe it was. But surely there's more to this argument...?

Trading shares is all about the balance of probabilities - you risk your capital only when the evidence weighs up on your side. Hang on... am I giving up too soon on the argument? Let's go back to our dictionary... Gambling = 'Play games of chance for money'. Ok. Share trading is a game of chance. Price has only two directions to move - to either go up or down. And we are in it for the money, as we established earlier. But the question remains is that, is it a game? Trading for a living is not a game. I have to treat it as a professional occupation, a professional business complete with a business plan to succeed. So, maybe on this one point I have disproved that gambling (!=) is not equal to share trading.

Ok, what about the second definition? To 'risk much in the hope of great gain'. Ok, we are here for great gain. Tick. But hang on - 'To risk much'? Share trading is about risk management. We don't simply "risk much" to succeed. Before a trader enters into a trade they must calculate the risk that they are taking. They must set their stops. Some even implement that 2 per cent rule. Share traders are managers in risk, so therefore they aren't gamblers in that respect too.

In conclusion, I think I have conclusively argued that share trading is NOT gambling. Although it does tread a fine line at that. The only few pillars that separate the gamblers from the true share traders in the market is having a business plan - the plan of attack that tells the trader when to enter and when to exit and secondly their risk management scheme. Good Luck.

-- Marco

Share trading is definitely

Share trading is definitely gambling for a variety of reasons. I will rebut some of your statements here :

1. You stated that "Share trading is not a game therefore it is not gambling." But there are professional horse bettors as well. They live of the money they win at the track. Horse racing is not a game but is classed as gambling so I don't think this argument holds up very strongly.

2. You stated "Share trading is not a gamble as you limit your risk". Once again I will use horse racing as an example. Horse racing professionals limit there risk to a maximum of 1% (which is less than the 2% you state for trading). Horse Racing professionals will only bet 1% of their bank on any selection and they minimise the risk by using form to determine the best horse at a good price.

You have to understand that I can actually limit my risk better in a horse race than I can on the market. Firstly I know my maximum loss. I can't lose more than I put in which might be $10 or $1000. This is similar with the share market except I might invest 10% of my total bank instead of 1% and have a tight stop loss of 2%. the problem is that if the market crashes (which it has done and will do again) I can no longer ensure I only lose 2%.

Hope this helps out. the only difference between the sharemarket and a horse race is that due to the TAB takeout of 15% the horse race is a negative game ( 85% returned to punters) whereas the sharemarket is a positive game ( should go up longer term ).

Don't fool yourself .. Share trading is gambling just with a lot more money. It is gambling whether you are invested for 2 mins or 20 years. Its just that a gamble on the share market has a greater chance of success than a gamble on a horse.

Good Luck investing.

Hi Paul, I do agree with

Hi Paul,

I do agree with you... if you kept reading my blog... you would have found that I changed my mind seven days after I posted up this article... "Gambling Revisited"

Thanks for your input!

Paul, The main issue I have

Paul,

The main issue I have with your analysis is that the "professional" punters on horse races etc is not gambling. They are limiting losses and executing risk management criteria in a not too dissimilar manner to our "professional" share investor - and so "fails" the gambling test. They are not risking much in hope of a larger gain.

A share investor who does NOT have a trading plan, and who does NOT have a risk & money management plan in place (and actually execute same) IS gambling. Just as the average person placing a bet on a horse race IS gambling.

The distinction is in the planning & execution of a risk & money management techniques employed by the "professional" as opposed to the "gambler" - and NOT the product (shares or horses) that they use as their investment product.

Download our FREE App


Signup for Free
Don't miss out on your free share trading articles.


Free Risk Money Management Calculator for those who sign up!