Many times, people confuse gambling for investing. What is the difference? Investing is the process of planning and executing this plan in order to achieve specific financial goals. Gambling on the other hand, is taking on risk for entertainment purposes. Investors should consider their risk tolerance, time horizon, financial goals and their overall portfolio. Gamblers generally take on risk, even though the odds are against them, without a fundamentally sound plan or objective.

When construction an investment portfolio, it is also important to consider one’s human capital—an individual’s capacity for earning in a specific industry in a specific region. For example, in order to diversify one’s portfolio, an individual working in Europe should probably have a few investments in Asia. If one works at a manufacturing corporation based in Europe, having multiple investments in the same region and in the same industry simply amplifies risk and leads to overly concentrated portfolios.

There are some firms who purport to be investment brokerages but are really gambling houses. Generally, they offer CFDs or Contracts-for-difference as the derivative of choice. Given the growing popularity of CFDs, we strongly feel the need to address the danger of trading these products with a short to medium time-horizon. With this, one would have access to most major currency pairs, major global indices, commodities and even some individual stocks. The difference between those selling CFDs and investment professionals is profound though. When you trade a CFD, you are effectively gambling that the price of an underlying security will either go up or down. The entity you are gambling with is the same firm that sold you the CFD. This means that in order for that ‘broker’ to make money, you must lose. With true investment professionals, either they should make money when you do or charge a reasonable and upfront brokerage fee.

Let us tell you about Jerry. He was a banker working in the United States who opted to trade CFDs from one of the largest providers. He took a view that the US Dollar should strengthen and hence shorted the EUR/USD cross. The CFD provider offered up to 200 times leverage. This meant that for every ½ percent move in the EUR/USD cross, Jerry would either make 100% or lose 100%. Upon initiating the trade, Jerry chose to use 10 times leverage (a relatively conservative position given the small movements of the EUR/USD.) After a few days, he would see an unrealized profit of 10%. He though, if only I had maximized leverage, I’d have a profit right now of 200%! He employed the maximum amount of leverage, as the CFD provider recommended, and pressed the position. The following morning, Jerry woke up and the EUR/USD had moved 1.2% against him. This meant that his profit earlier and his initial capital had all been wiped out. Jerry had gambled, not invested.

Stop gambling and start investing to achieve financial freedom and plan for the future.