4. Is Trading Gambling?... Part 1

Is Trading Gambling?...A view from Michael J. Gutmann (Futures Magazine)

This topic is one of the most hotly debated issue in trading. However, before we start the discussion, I think it is important to start with a neutral mindset and not be prejudice over any perspective or opinion. Although we may still have a different conclusion or opinion at the end of this discussion, but it is important that we discuss this with an open mind and take effort to understand and hopefully agree with the facts. 

Trading and gambling has many similarities. Both require risk taking. Both is a zero-sum game. Meaning, there is a winner in every looser, it is purely a transfer of wealth from the looser to the winner with no additional wealth created. But is trading totally gambling? Most people who are not directly in the financial trading marketplace would think so.  I once came across an article in the Futures Magazine website posted as a blog by Michael J. Gutmann entitled "Are Trading and Gambling the same?". Gutmann had discussed the topic quite comprehensively, especially on the reason why society has a negative view on trading. 

Gutmann mentioned in his blog that one of the reason why people are skeptical about trading is because the outcome, like gambling is unpredictable. Society generally prefers the shoemaker-type endeavor because it creates something others find valuable. New wealth creation simply means capital gain out from an effort put into an activity that creates value to whoever is willing to pay for that effort. For example a shoe-maker. Trading and gambling are both fundamentally stochastic, that is unpredictable, and because of this they are often viewed negatively. We feel an “honest effort” has more predictability to it. However, most people will have a more positive view on an investor when compared to a trader even when both investor and trader involve in taking risk in the financial market. Gutmann said that this is so because investment enable new wealth creation because it involves delayed gratification – new wealth can be realized after a longer period time either due to appreciation of the stock value (note that depreciation of the value can also happen). There seems to be an inherent respect for a long-term investment that turns out well: The successful investor is considered patient and prescient. On the other hand, trading and gambling have a get-rich-quick aura to them and are often viewed with disdain because of it.

Gutmann went on to discuss the differences between trading and gambling in terms of how each of them executes their trades. From the article, traders may view themselves more technical, even scientific, than gamblers, relying on intricate formulas and algorithms for success. But there are professional gamblers who use probability and statistics to help them increase their chances to win. There are gamblers who have invested equally in their success relative to the sophisticated traders. One obvious different which I see is that traders pits their skills and knowledge against the vast market. Gambling generally pits individual against another individual. 

Although the blog did not end with a very clear conclusion for our question, Gutmann did however said that whether trading and gambling is the same or not, very much depends on the individual involved.  His statement probably sum up my thoughts. However, before we conclude my position on this question, I would like to discuss, in my next section, with a few more points not covered by Gutmann in the second part of this discussion on "Is trading Gambling?". Hopefully, we are able to draw a better conclusion. 

Proverbs 18:2... Fools find no pleasure in understanding but delight in airing their own opinions. 

3. Role of A Trader

Before we address the question if trading a sin, it is important to understand the role of a financial trader. How do they contribute their trades to the world economy? Or how do they affect common people in the streets or the society? Well, it turns out that traders plays a more important role in the financial marketplace then most people thought. But before we step into into the world of financial trading, I thought we should discuss how trading is done where most people would understand, say trading a common stock like chicken. 

Every morning, the chicken seller will buy chicken from the poultry dealer. Depending on the demand and supply of chicken, a willing buyer will purchase chicken from the dealer at an agreed price through a bidding process. The complication comes when the demand and supply of the chicken varies everyday and even during the day. For example, if there is news that there will be a major flood near the chicken farm which will affect the delivery of chickens to the market, this will cause a surge in demand for buyers for they may want to secure the deal even if it means to pay a higher price for the chicken. In cases like this where there is a sudden rise in demand or drop in supply for chicken and there is only one dealer, then the genuine buyer will not be able to get the chicken easily. Even if he can, he will probably not able to get it at a price that he wants as the sole dealer will have full control over how much he want to sell. So, in order to reduce this risk and also to have a fair market, it must increase its liquidity by increasing the number of sources the buyer can buy the chicken from. This will limit the tendency of over-charging by the sole dealer. 

The easiest way to increase liquidity is to allow buyers to also sell to other traders in the market. Some trader will buy the stock and then sell them on the same day at a higher price.  Some will store the chicken to be sold in the later date. Some will place order for future delivery at an agreed price using contracts. Those who sell it on the same day is like Day Traders in the financial trading market, those who keep the chicken and sell them at a later date are the Position Trader. Finally, those place an advance order are like Futures Traders. We will discuss a little more in detail about futures trading in a later section. Thus, in addition to dealers selling chickens, anyone else who wholes the stocks or future contracts are also allowed to trade their stocks or contracts in the marketplace. This will bring about a fairer price in the market and also prevents monopoly in the market, controlled by just a few powerful players in the market. This is also how the trading market came about. 

Of course, other then chickens, traders can trade other commodities like oil, wood, coal, coffee, sugar, and many other commodities. The same process can also be applied in the buying and selling of currencies, company's share for public listed companies, government and company bonds, index futures and any other legal securities that genuine investors wanted to buy for investment. Without traders, long term investors will not be able to buy the stocks at a fair price as the big fund managers or dealers will have a big control over how much he will sell the stocks to the public, likewise for currencies and bonds.  Again, you may also ask what value does financial trading add to the society where people don't invest.  It turns out that liquidity in the financial market affects almost everyone in the public in some way or another. For instance, in order for insurance companies to pay interest or bonus to policy holders, these companies must invest in the financial market. Or anyone in the street who wanted to change the dollar to another currency, he or she will be able to do it fairly in a fair market. 

I hope you are now able to see the role of a financial trader. It is important to understand the role of a trader and how they affect our life both directly like buying a chicken with fair price and indirectly like how your insurance company can pay you your yearly bonus. This is the most fundamental understanding that we need to know and accept before we can address if the question if financial trader has a role in building His kingdom on earth. However, there is still one important doubt that we need to address and that is "If trading is a zero-sum game where one is a winner, there is also a looser, isn't this very similar to gambling?" Yes, the question is valid and so let us discuss about it in the next section of the blog. 

Romans 12:4-8...For just as each of us has one body with many members, and these members do not all have the same function, so in Christ we, though many, form one body, and each member belongs to all the others. We have different gifts, according to the grace given to each of us. If your gift is prophesying, then prophesy in accordance with your faith; if it is serving; then serve; if it is teaching, then teach; if it is to encourage, then give encouragement; if it is giving, then give generously; if it is to lead, do it diligently; if it is to show mercy, do it cheerfully.