bazinga! TradingTrading is the act of buying and selling...

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Trading

Trading is the act of buying and selling securities. All investors trade, because they need to buy and sell their investments. But to investors, trading is a rare transaction, and they get more value from finding a good opportunity, buying it cheap, and selling it at a much higher price sometime in the future.

But traders are not investors.

Traders look to take advantage of short-term price discrepancies in the market. In general, they don’t take a lot of risk on each trade, so they don’t get a lot of return on each trade, either. Traders act quickly. They look at what the market is telling them and then respond. They know that many of their trades will not work out, but as long as more than half work, they’ll be okay. They don’t do a lot of in-depth research on the securities they trade,
but they know the normal price and volume patterns well enough that they can recognize potential profit opportunities.

Trading keeps markets efficient, because it creates the short-term supply and demand that eliminates small price discrepancies. It also creates a lot of stress for traders, who must react in the here and now. Traders give up the
luxury of time in exchange for a quick profit.

Speculation is related to trading, in that it often involves short-term transactions.

Speculators take risks assuming a much greater return than might be expected, and a lot of what-ifs may have to be satisfied for the transaction to pay off. Many speculators hedge their risks with other securities, such as
options or futures.

Gambling

A gambler puts up money in the hopes of a payoff if a random event occurs.

The odds are always against the gambler and in favor of the house, but people like to gamble because they like to hope that if they hit it lucky, their return will be as large as their loss is likely.

Some gamblers believe that the odds can be beaten, but they are wrong.

(Certain card games are more games of skill than gambling, assuming you can find a casino that will play under standard rules. Yeah, you can count cards when playing blackjack with your friends, but it’s a lot harder in a professionally run casino.) They get excited about the potential for a big win and get caught up in the glamour of the casino, and soon the odds go to work and drain away their stakes.

There is such a thing as a fair lottery, which takes place when the expected payoff is higher than the odds of playing. You won’t find it at most casinos, although sometimes the odds in a sports book or horse race favor the bettor, at least in the short term. A more common example takes place in lotteries when the jackpots roll over to astronomical amounts. For example, in March of 2007, the multi-state Mega Millions lottery (US) had a jackpot of $370 million, but the odds of winning were 1 in 175 million. This means that a $1.00 ticket had an expected value of $2.11, making it a fair proposition.

Trading is not gambling, but traders who are not paying attention to their strategy and its performance can cross over into gambling. They can view the blips on their computer screen as a game. They can start making trades without any regard for the risk and return characteristics. They can start believing that how they do things affects the trade. And pretty soon, they are using the securities market as a giant casino, using trading techniques that have
odds as bad as any slot machine.