The volatility of the stock market is at one of its highest points in recent memory. It might be tempting to jump on the roller coaster and try your hand at playing the market, as buying in the dips and selling at the peaks could potentially result in some good returns. But at what point does day training on the stock market more closely resemble a form of gambling? And can it put you at risk for developing a compulsive gambling disorder?
To start, its important to identify and explore the intent and behavioral differences between the primary types of people participate in the stock market - Long-Term Investors and Day Traders.
Long-Term Investing - Slow and Steady
Investors tend to view the stock market with an eye towards the long term. For many investors, this means developing an investment plan - either on their own or with the help of a certified financial planner - which takes into account their goals and their comfort level regarding risk. There is a significant level of research involved as well as an understanding that the mantra "slow and steady wins the race" is true.
Investors realize that the stock market will experience ups and downs - sometimes dramatic ones, such as we are seeing right now due to the economic implications of Covid-19. In nearly all cases, investors choose to leave their funds in their investments, so they can meet their long-term goals such as retirement or paying for their kids' college education.
Day Trading - Short-Term Payoff
Day traders take a much different approach to investing in the stock market than your typical long-term investor. These investors tend to be much more reactionary and follow the market's whims. In fact, many day traders invest based on the thought process that the market is always right.
Day trading tends to provide only short-term payoffs -- if anything at all. The stock market provides is very little in terms of a long-term payoff for day traders. As a result, day trading isn't for everyone due to the high risk, the unlikelihood of a payoff and the inability to use it as a long-term investment vehicle.
Trading—as opposed to investing for the longer term—can be viewed as a vehicle to generate cash flows just like a business, and understanding the business of gambling can certainly apply to the business of trading, when conducted in a healthy and reasonable manner. Trading is undoubtedly exciting - linking markets throughout the world, and connecting investors with different ideas, backgrounds and strategies.
However, when a person delves into day trading mainly for the excitement or social proofing reasons, this can be first sign of concern. Trading in a gambling style, rather than in a methodical and tested way, can result in emotional highs and lows, poor judgement, and increase the risk of significant losses.
Experts have said that dramatic and unpredictable fluctuations in stock prices create a similar "high" to that experienced by gamblers who see a big bet come in at the races or other sporting event. This cycle of ups and downs can stimulate your hormones, even creating trading withdrawal symptoms.
Watch for Signs That Your Stock Trading is Turning Into Addictive Behavior
Gambling can be defined as staking something on a contingency. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are falling into gambling habits and behaviors without even knowing it.
Entering into a financial transaction without a solid investment understanding is gambling. Not unlike other forms of gambling, investing in the stock market without due diligence, research, and professional advice, can also be based on pure luck.
Regardless of your investment habits, if your investment portfolio has you up at night, checking markets constantly or if you’re making trades even when you don’t really need to, you might be developing a behavioral addition to trading. The sooner you become aware of that you might have a gambling addiction, the sooner you can get the help you need.