Are You a Gambler, a Trader, or an Investor?

Gambling, Growth Stocks, Investing Strategies
Roulette wheel with the ball landing on green 0.

I don’t know if I am amused or appalled by how much a gambling mentality has taken over much of our lives. For example, I recently noticed that NFL football analysts spent as much time on the betting spread as they spent discussing teams’ potential to win or lose.

You see and hear gambling terms peppered throughout the news and reporting in the financial world, too. A recent example would be this headline from a Wall Street Journal article: “War in Ukraine Forces European Bulls to Unwind Bets.”

The “unwinding of bets” sure sounds like a gambling move to me.

I want to divide stock market participants into three categories for this discussion: gamblers, traders, and investors. Each group has a very different approach to making money from stocks.

And different rates of long-term success, too…

First we have stock market gamblers, who treat stocks just like any other form of wagering. The gambler’s investment decisions are based on hot tips from friends or online sources. Gamblers try to catch whatever is hot and ride the trend. A gambler typically has no idea about the business of any stock he buys. He may only know the stock symbol and have no idea about the company’s name or what it actually does.

Gamblers like to use stock options instead of buying and selling shares. Options allow gamblers to greatly leverage their bets, matching the return on hundreds of shares with options that cost a few hundred dollars per contract. Gamblers don’t take the time to learn the options trading details and often don’t understand that options are a time-limited, all-or-nothing bet.

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Like gamblers of all other stripes, stock market gamblers almost always end up as losers. The nature of the stock market has more buyers when a stock is at its peak value when it’s hot, and more sellers at the bottom. By the very nature of how they pick their “bets,” gamblers end up buying high and selling low – or with options they bought high and then wind up watching them expire worthless.

Second, we have traders who have a thought-out strategy to profit from share price swings in the markets. They will employ one or more derivative indicators that, using historical results, have the potential to predict future price action. Trading primarily uses stock price action to predict what the stock price will do.

Many trading strategies use stock options. Options can be used in a wide range of combinations that allow traders to profit from a predicted stock price increase, a decline, or even if the stock price goes nowhere. Option combination strategies can be conservative or aggressive.

Successful trading will be at least a part-time job, with a lot of time spent in front of a computer trading screen. Here at Investors Alley, we have several options trading experts who employ different options strategies to provide trade advice to their subscribers. Check out my friend Jay Soloff’s excellent introduction to options trading right here.

Last but not least, we have stock market investors who buy shares of stocks to become owners of the company and participate in the its business success and profits. Investors look at company business results and business prospects to form an opinion on where the business will go and how that will affect the share price. Investors also use some form of fundamental analysis to gauge the company’s future prospects.

Investing strategies mostly fall into one of two camps. Growth-focused investors look for companies with fast-growing revenue and profits, and are willing to pay a higher relative value for shares to participate in the growth. Value investors looks for companies with stable, profitable businesses that have fallen out of favor with investors. This type of undervalued stock typically gets rediscovered, pushing up the share price. Value investing requires patience.

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Value investing often includes dividends as part of the total return expectation. Dividend income provides cash returns and can be a significant portion of the total returns. Starting with The Dividend Hunter, my newsletter services look to dividend income to provide attractive and stable investment returns.

An investment strategy should be designed to work for the long term. I often say I want my strategy to work for 30 years or more. If you are in retirement living off your investments, you want a strategy that will let you live the retired life you want.

Investing does not have to be time-consuming. Individual stocks should be reviewed once per quarter, when companies report their earnings results. An investor needs the tools to compare different companies and their stocks to pick ones that best fit the chosen strategy.

A sound trading strategy can generate attractive profits. Not everyone has the time or the disposition needed to be a successful trader; however, everyone who plans to retire someday and live off retirement savings needs to have an investing plan and strategy.

If instead you treat stocks like gambling, get some counseling.

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