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Is Trading in stock market gambling? Myth Debunked!

Trading

CA Shefali Mundra

29 Nov, 2022
7 mins read

Guessing in the stock market might lead to gambling in the stock market.

Alas! Stock market traders are usually looked upon as speculators trying their luck against the odds.

Well, trading and gambling may get construed as one, but they are pretty different fundamentally. Unlike gambling, the success or failure of trading in stock markets is not dependent on the roll of the dice. Trading is not a one-time jackpot but a disciplinary approach to picking the right stocks for wealth creation. It requires consistent efforts and analytical skills to analyze the company's financial statements, growth prospects, credibility, and past performance, with planned entry and exit strategies.

Counterproductive to this, gambling is a game of chance and easily accessible for all. People with a high-risk appetite bet or stake something of value with an aspiration to gain on the game's outcome. All it calls for is a legal age to start and a high-risk appetite to bear the brunt of losses.

The reality of the stock market is way different from gambling. Equating both will jeopardize one's financial situation.

Why is Stock Trading Not Gambling?

Successful traders follow a consistent strategy for wealth creation, and this is something that demarcates trading from gambling. Obtain a quick understanding of some significant reasons that genuinely explain why trading and gambling are grossly different.

       1. Trading Involves Facts and Figures.

Equity traders get exposed to the unexpected twists and turns of the stock market. To survive the onslaught of the stock market, equity traders conduct in-depth research on the companies to make wise and informed decisions. Understanding financial statements, growth prospects, ratio analysis, market and price trends, charts, and other factors are essential before Trading in the stock market.

Unlike trading, gambling is a psychological game, and a gambler has no access to factual information, substantially increasing their risk.

       2. Stock Exchange Vs. The House.

Stock exchanges are a central authority acting as an intermediary facilitating trader to buy and sell securities seamlessly. The stock exchange is a reputed organization that disseminates relevant information and transparently conducts trades with minimal charges.

In contrast, casinos (house) in gambling is the counterparty that is very interested in ensuring that the gambler doesn't make enough profit to bring the wealth of the casino down. They plan games in a way that tries to keep an edge over the gamblers, with most benefits returning to the casinos.

Stock exchanges are indifferent to the profit or loss a trader makes until it doesn't impact their solvency.

       3. Greater Control Over the Outcome.

As gambling is a game of chance, one can only hope to have the odds work in their favour. With a lack of information and data to create an opinion, gamblers are highly doubtful of the outcome. Alternatively, Trading is a well-researched disciplinary approach empowering traders to have better control over the outcome.

Successful traders' Plan the Trade, Trade the plan' and consistently follow the plan for profitable results. For instance, if a trader's risk appetite is low, one can trade in stocks with a solid industry presence and strong fundamentals. This approach can be followed consistently for high returns and to minimize risk.

       4. Quick Profits Vs. Slow Profits.

Gambling provides quick profits but also quick losses in comparison to trading. People often visit casinos to make good money. It is a famous analogy that a gambler might make stunning profits on day 1 in casinos, followed by a slight loss on day 2, and then further tries to recover the loss. In this process, the emotion of greed and hope drives the action, and a gambler tends to lose all the profits made on the first day.

In contrast to this, trading involves patience, skill, and discipline. Traders try to pick the right stocks striking a perfect balance between risk and return. The frequency of profits is slow but sustainable.

       5. Time Horizons.

Time horizons are also different in the case of gambling and trading. Gambling is a game with pre-defined deadlines and dates to determine if one has won or lost the game. However, trading in stocks can be short-term or long-term, wherein the buy and sell scenarios are decided based on the company's growth.

Investment in good dividend paying will reap for the years to come. But in the case of gambling, there is no mid-way. One will lose for the other to win, and it cannot continue for long.

       6. Tax Implications.

It is one of the most crucial and interesting aspects to know before trading or gambling. Under the Income Tax Act 1961, if the listed equity shares are sold within 12 months of the purchase, the seller might have a short-term capital gain(STCG) or short-term capital loss(STCL). STCG is taxable at 15%(surcharge and cess applicable), irrespective of the income tax slab. In contrast, equity shares sold after 12 months from the date of purchase, the seller will have a long-term capital gain(LTCG) or long-term capital loss(LTCL). LTCG is taxable at 10%( with applicable surcharge and cess) in excess of ₹1,00,000 and without the benefit of indexation.

In contrast, income from gambling, winning from lotteries, card games, or any betting/gambling exceeding ₹10,000 annual limit is directly taxed at the flat rate of 31.2%(including applicable cess) under income from other sources. Additionally, it is pertinent to note that the gambler is not allowed the exemption limit of ₹2,50,000 while filing the return of income.

 

Conclusion.

Excitement, social proofing, and emotions can drive people towards gambling or trading, but they are invariably different. Gambling is a game of chance wherein the risk of losing is lofty. Perpetual trading with knowledge, control, and expertise can reap a trader with high profits in the long run. To summarize, refraining from reckless gambling and trading is critical to avoid loss of money.

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