Trading on the stock market is often described as a bit of a gamble. But how much does it really have in common with a visit to the casino or a bet on the Patriots to win yet another Super Bowl? One thing is certain, both stock market trading and legal gambling are becoming increasingly popular in everyday society.
In this age of low interest rates and alternative investment strategies, everyone knows you have to speculate to accumulate, and this is a theme that runs through both trading and gambling. What are the similarities and the differences?
It is one thing to say that gambling and trading are both becoming more common, but it is worth taking a look at why. There are a number of factors in play, but the overwhelming one is the internet and smartphone age. Trading used to involve getting to know a stockbroker and discussing trades over the telephone or face to face in an office. But the internet has eliminated all the barriers and complications.
Online platforms allow users to set up a trading account in a matter of minutes and get down to business. Stockbrokers are still there to provide support and facilitate the trade, but most platforms provide a simple communication channel to make things far simpler than they used to be.
The same applies to gambling – online casinos have exploded in popularity over the past few years. But here, there are also changes in the regulatory landscape to take into account.
States such as New Jersey and Pennsylvania are at the forefront of evolving attitudes towards gambling in the USA. New Jersey, in particular has been hitting the headlines with changes to its online gambling laws to attract players from both within the state and the from international markets including the UK. The 888 casino in NJ is a case in point, and the review on PlayingLegal gives an unbiased summary of the bonuses and benefits that are available to members of what must be the most well known and long-established online casino in the state. But what are the chances of success, and are New Jersey residents better spending their money at the casino or investing it on the New Jersey Stock Exchange?
Skill, luck or a bit of both?
To answer that question, we need to think about the basis for each wager, bet or trade. Those who argue that trading has little in common with casino games will say that in the casino, the result is all down to luck, whereas on the trading floor, investors use their skill and judgement to decide what and when to buy and sell.
This is true to a certain extent, but is an over simplification. If you go to a casino, either online or in Atlantic City or Vegas, and start playing roulette or craps, you are trusting to luck on the outcome. Sure, you can still strategize about how much to wager, and you might even try a progressive betting system, but ultimately, success or failure comes down to the roll of the dice or the spin of a wheel.
Think about blackjack or poker, however, and it is another story. Here, skill and experience have a real impact on your odds of success. A successful poker player looks at both his cards, the ones being dealt and the subtle signs and body language of his opponent. At its heart, there is a degree of luck involved, as the cards are dealt at random, but if a first time player takes on a world poker champion, nobody would seriously suggest that they have an equal chance of winning.
Now apply these same principles to trading. Anyone can start trading with little or no knowledge, purchase some shares and hope they will go up in value. But to do so with this approach bears more than a passing similarity to placing everything on red at the roulette wheel. We’ve all heard the standard warning that investments can go up or down, and with no other information to go on other than “we like the name of the stock,” this one could go either way.
Professional investors, on the other hand, can be compared with those poker champions. They look at a multitude of signs and indicators, not in the mannerisms of their opponent but in the price behavior of the stock, and other patterns in the broader economy, to assess whether a price is going to go up or down. Arming themselves with this knowledge is very similar to learning basic strategy in blackjack. It doesn’t allow them to gaze into a crystal ball and know what the price is going to do tomorrow – but it does give them a better chance of getting it right more than they get it wrong.
Leveraging your skill
Therein lies the key similarity between trading and gambling. Those who make a success of either are the ones who can shift the odds of success in their favor by making the best use of their skills. This might be through studying the financial markets for a trader, understanding the strengths, weaknesses and form of different teams in sports betting or spending years learning different body language signals at the poker table.
On reflection, this is intuitively clear, but what might be less obvious is that the converse also applies. In a scenario where skill is important, then it can reflect more of a risk to the inexperienced that a pure game of chance. For example, buying stock in a company because your Uncle used to work there or backing a horse just because it has a funny name is a recipe for disaster – and so is taking on an experienced poker player when you learned the rules yesterday from an online tutorial.
In these circumstances, the likelihood of failure by far outweighs the chances of success. It might sound flippant, but the advice is deadly serious – if you don’t know what you are doing, you are genuinely better off at the slot machine or roulette table.