Thursday, May 7, 2009

As a reminder (Investment, Gamble and Risk)

Investment, Gamble and Risk

Laymen always jumble up the meanings of these 3 terms. To them, buying lotteries is an investment; playing stock market or futures product is a gamble. Risk is anything that jeopardizes your job (monthly salary)!

To certain extent, they may be right. But then again, it depends on how much the person knows about his rice-bowl trade and the risk management skills to be applied!

Some ignorant newbies ever told me market entry in futures and FX market was like tossing a coin - so market is about either going up or coming down. I strongly disagreed!

Profit-trading in the market needs some skills. It involves an entry point, an exit point and a stop loss point. A miscalculation of entry price level will jeopardize the other two. Chances of making money or better profit margin will then become minimized!

This set of skills can only be sharpened and enhanced through years of practice and self-enrichment. Many beginners incurred losses because they carried the thoughts that trading was a gamble. They thought it was about market ups and downs. Inexperienced traders think luck plays important part. Skills are secondary. What do you think?

Generally speaking, most people like to punt money in something that is capped with maximal losses e.g. buying lotteries. Some guys told me they were investing with the lottery operator hoping one day they could recoup all monies through a big windfall. To me, I prefer to do something that makes monies everday and plan for early retirement; rather than be broke for most part of my life and hope to be rich just suddenly one day!

Over recent years, many retail traders went into option trading after being baffled by some unscrupulous coach. The banner of such workshop is always sold on the tag line "limited loss, unlimited profit".

That is a fact though. In fact, there is nothing wrong with this caption. However, how different is it if you compare this tag line to buying a series of lottery tickets? Think again carefully.

At the end of the day, most newbies in options trading gave me feedback that they had made little or no money after started trading in it. Majority ended up in red from many small and limited losing positions. Of course, there were others who have made good monies and enjoyed the profits. My point here is not about options trading, stock trading or futures trading. It is about the in-depth knowledge and the proper risk management skills that a trader should have.

The difference between investment and gamble is vast. Investment is executed based on calculated risk and gamble is always outlines on a 50/50 chance or if not, much lower!

Let me stress again. RISK is everywhere!

You could lose your job tomorrow or next month, just like that. In my context, that is also considered as a risk!

As the old saying goes: "High risk begets high gain. Low risk begets low return."

Do not complain of little profits if you have been involved in low risk game. Nevertheless, you could choose to learn or not to learn the techniques of playing high risk games.

Summary:
What you have believed to be low risk may be non-profitable. Instead, you should learn how to control and manage risk in a high-profit yielding business.
Disclaimer: Basically this is quoted but i'm unsure of the source. Whoever know it, pls do drop me a comment so that I can address it. Thanks.