What's the difference between trading/investing and gambling?

[Tysonboss1]

Yes you are gambling,

With naked short puts.

???

I don't really get what you mean, I don't buy shares with the intention of selling covered calls on them. I only buy shares in companies that I already want to invest in as a long hold, However if there is a market for me to also sell covered calls along the way at a price i would be happy to sell at then I would be crazy not to.

 

[Tysonboss1]

Would have thought short term price movements are easier to predict compared to say 3 months out.

when you make a guess that a certain share will be worth $X amount tommorrow or next week you are speculating, especially if you have done little or no analysis into what the company is.

there are even financel instruments out there such as CFD's and options where a trader or speculater can pay real cash and all they get in return for there money is a short term bet on the market. to me there is no difference between doing that and placing a bet with a book maker at the track.

 

[mazzatelli]

The guy on the other side of the transaction is making a shorterm bet that by the end of the month the price will be higher than what I have aggreed to sell at and he can make a profit on the difference. He is betting a couple of $1000 that the share price will be $X by X date, this is pure speculation and gambling.

I only buy shares in companies that I already want to invest in as a long hold, However if there is a market for me to also sell covered calls along the way at a price i would be happy to sell at then I would be crazy not to.

The counterparty is more likely to be a market maker - who may have just locked in an arb, discount-arb etc &/or offsetting deltas and being neutral to direction.

You, on the other hand, are now short the synthetic put - and speculating that the stock will remain below your strike [gambling?] until expiration.

Despite your holdings get called away, you will make a profit - but wasn't the original purchase, in your words, a long term investment?

 

[cutz]

The guy on the other side of the transaction is making a shorterm bet that by the end of the month the price will be higher than what I have aggreed to sell at and he can make a profit on the difference. He is betting a couple of $1000 that the share price will be $X by X date, this is pure speculation and gambling.

More often than not the guy on the other side is a market maker buying a contract at below theoretical value.

Or the other side may be a trader taking a long volatility position, may be a trader closing out a short position, may be a trader wanting to adjust, ect. ect. ect.

What I'm getting at is just because you're selling covered calls, it doesn't mean you are not gambling but the other side is.

 

[skyQuake]

when you make a guess that a certain share will be worth $X amount tommorrow or next week you are speculating, especially if you have done little or no analysis into what the company is.

You don't have to know what the company does to trade it profitably, a general idea will do.

there are even financel instruments out there such as CFD's and options where a trader or speculater can pay real cash and all they get in return for there money is a short term bet on the market. to me there is no difference between doing that and placing a bet with a book maker at the track.

isnt that what trading is all about?

 

[Tysonboss1]

You, on the other hand, are now short the synthetic put - and speculating that the stock will remain below your strike [gambling?] until expiration.

Despite your holdings get called away, you will make a profit - but wasn't the original purchase, in your words, a long term investment?

I wouldn't sell an option on a stock unless I was happy to sell at that price, So I am not gambling on the possibility of it staying below or going above a certain price to make a profit.

But I do get your point and it is inline with my other comments that when you buy an instrument where you are going to make a profit or a loss based on somthing happening inside a certain time frame or event you are gambling,

it is different to taking a long postion in a company that you have done analysis on and decided that based on the earning power of it's assets the price you can buy it for will give you a satisfactory rate of return over time.

 

[Mr Z]

Gambling is binary, win/lose, make money/lose ALL your money (for that position anyway).

Trading or investing, in most circumstances, offers you the opportunity to control loss and to skew the odds of success very much more in your favor. The latter point is the most crucial and the key to success... control what you can i.e. losses.

Gambling does not offer that level of control, you could argue that over a range of bets you can manage your money when gambling but the fact remains that every new bet brings the same or similar level of risk. Where as when trading once you take the risk the amount you lose, if it goes against you, is generally up to you.

The way you trade determines if you are in fact a gambler, if you have risk control down pat then I would argue that you are not gambling... if not then you are.

& JM Humble O!

 

[Tysonboss1]

You don't have to know what the company does to trade it profitably, a general idea will do.



isnt that what trading is all about?

Exactly, Trading = gambling,

The words Trading and Investing are not interchangable (despite that fact that 90% of people on this forum seem to believe the words are interchangable)

 

[Tysonboss1]

You don't have to know what the company does to trade it profitably, a general idea will do.

I don't think you can make a true investment without knowing all the facts about a company.

I guess if the people that say investing is a gamble are talking about buying a stock without carrying out the proper research then yes it is a gamble.

 

[Mr Z]

Exactly, Trading = gambling

You cannot make a blanket statement, it entirely depends on the individual and the work that is put into a 'trade'. Conversely investing can be tantamount to gambling if it is handled badly.

Trading, investing, gambling are not equivalent OR exclusive terms!

The way YOU do it may or may not be gambling.

 

[Mr Z]

I don't think you can make a true investment without knowing all the facts about a company.

1. Knowing all the facts is undoable.

2. I will not trade a company unless I know a lot about them starting with the financials through to their prospects.

3. Investing is done for income, if there is no income it is a trade or speculation for capital gain. That is the only difference between my trades and investments other than as a generalization trades tend to be of a shorter duration than investments... but not always!

 

[trainspotter]

Splitting hairs on terminology here ladies and gentlemens.

RISK is the word we are looking for. I take a risk buying shares/property/people BUT it is a calculated risk.

Gambling is CHANCE ...... Yes you can play the odds and cover bets on the crap table or hedge on roulette. That's a given. Horses used to be my thing and working the odds to spread the bet so it did not matter who won or lost I still made a small return.

Buying stocks is not gambling at all. It is a calculated RISK.

 

[So_Cynical]

3. Investing is done for income, if there is no income it is a trade or speculation for capital gain. That is the only difference between my trades and investments other than as a generalization trades tend to be of a shorter duration than investments... but not always!

I trade for capital gain, establish free carry then and hold for income.

Splitting hairs on terminology here ladies and gentlemens.

RISK is the word we are looking for. I take a risk buying shares/property/people BUT it is a calculated risk.

Gambling is CHANCE ...... Yes you can play the odds and cover bets on the crap table or hedge on roulette. That's a given. Horses used to be my thing and working the odds to spread the bet so it did not matter who won or lost I still made a small return.

Buying stocks is not gambling at all. It is a calculated RISK.

Gambling can be calculated risk taking...every time i buy a stock, i know its a gamble as to Wether the SP goes up or down, im taking a calculated risk that i have brought at a point in time where the SP is more likely to rise than fall over my entry investment time frame.

And im right 2.44 times to 1

 

[trainspotter]

Gambling can be calculated risk taking...every time i buy a stock, i know its a gamble as to Wether the SP goes up or down, im taking a calculated risk that i have brought at a point in time where the SP is more likely to rise than fall over my entry investment time frame.

And im right 2.44 times to 1

Most people that invest or trade know what they are doing. You do not go to your broker and ask for $500 on stock XXX because you have a feeling in your water? Go to the TAB and ask for a $5 mystery bet instead.

You can cover the spread on gambling by playing odds (horses are good because you have stats to work with) but usually it is a game of chance.

But mostly on the choclolate wheel in the casinos you will lose. When you lose your money is gone. PERIOD. With shares you have half a chance of stop loss and selling before the blood runs in the street.

Well done on the 2.44 to 1 ratio So_Cynical. You must make some great calls. Far outstretch's my capacity.

 

[Tysonboss1]

3. Investing is done for income, if there is no income it is a trade or speculation for capital gain.

You can make an investment in a company that is not providing income directly to you.

If a company is taking it's earnings and reinvesting it in a way that grows eps or buying back it's own stock you can hold this share as an investment with a fair degree of certainty that over time the market will put a higher value on the stock and you will get capital gains.

 

[So_Cynical]

Go to the TAB and ask for a $5 mystery bet instead.

I never did understand the thinking behind the mystery bet punter.:bonk:

 

[Mr Z]

TS is right and it is basically what I was saying. If you can and do control the risk appropriately it is no longer a gamble. I am no gambler but I understand that there are ways of controlling your risk in BlackJack by remembering or counting cards and working out odds. Do it and get caught and you will not be playing at that casino again! They hate you managing your risk because it turns the odds against them. As TS pointed out there are ways of managing your horse betting. I once new a pro better he consistently pulled down 50K a year when 20K was a good wage. He was methodical and controlled his risk. How he did it I didn't get and was not interested in, however I seem to remember that the ATO wanted to tax him under some rule or other because they classed him as 'professional'... anywhooo beside the point.

So yes I would say that is the point of difference, risk management, if you are managing risk effectively it is no gamble. Even if a trade goes against you it is a controlled situation... if not then its a gamble and that goes for most of life IMO.

As for investing or trading... You can argue that until moos come home but for my purposes and the way I was taught it is an investment IF it produces an income stream, if not it is speculation on an outcome. The difference is that an investment, if wise, need never be sold to gain. On the other hand a speculation or trade must be sold to realize gain. If you don't draw that line then there is no difference between the two save semantics and is there any wonder there is confusion! I research my trades as much as my investments, in all other respects they can be completely interchangeable. Anyway, that is for you to decide what you call what, it will not change my outlook

 

[mazzatelli]

The counterparty is more likely to be a market maker - who may have just locked in an arb, discount-arb etc &/or offsetting deltas and being neutral to direction.

More often than not the guy on the other side is a market maker buying a contract at below theoretical value.

it is different to taking a long postion in a company that you have done analysis on and decided that based on the earning power of it's assets the price you can buy it for will give you a satisfactory rate of return over time.

So are our option market makers gamblers?
They are neutral on direction, treat the underlying as random, don't take long term views of the spot they're trading etc but still churn out money on a consistent basis.

I asked this question of you about OTC derivatives, bond traders etc who perform extensive analysis on vol, yield curves, effect of earnings/announcements on term structures, global macro models etc in another thread but never got a response.

All gamblers are they?

 

[Tysonboss1]

So are our option market makers gamblers?
They are neutral on direction, treat the underlying as random, don't take long term views of the spot they're trading etc but still churn out money on a consistent basis.

I asked this question of you about OTC derivatives, bond traders etc who perform extensive analysis on vol, yield curves, effect of earnings/announcements on term structures, global macro models etc in another thread but never got a response.

All gamblers are they?

If they are involved in arbitrage in it's true definition or acting as intermediaries in the transaction of others then I would not say they are gamblers, however they are not investors either.

I would say that people involved in arbitrage and intermediary actions are performing a vital role in the economy and being paid for their work that they put in to find and piece together the transactions. this is being paid for labour, and it is different to earning a return as a passive investor.

 

[Tysonboss1]

The Main man explains it all a little better than me, Watch the video on the below link and listen to Warren Buffett explain the difference between investing and speculative trading.

http://www.youtube.com/watch?v=LH03WyBpgjU&NR=1