Saturday, 23 June 2007

Gambling or Investing ?

In Malaysia, I still have many friends around me thinks that share trading is just another way of gambling. Yes, I agree that share trading does involves luck. But share trading is more like trading goods, for example antiques.

Judging the value of an antique requires knowledge, skills and experience. A noob would probably go into the market, bought an antique that he thinks worths $10000 while the true value is just $2000. Contrary, an expert would be able to buy one that worth $10000 with the price of $2000 from a noob. Why this happens is that the expert could judge the true value much more accurately compared to the noob.

Similar to trading with the scenario above, when trading shares, you are actually competing with others in judging a company's value. This could be done by looking at the profile of the company including the profits, assets, debts, etc. If you know that a company's value should be $10 and the share is selling @ $6, its undervalued. Provided what you know is true and nothing but the truth.

Buying an antique, you owns it wholly. Buying a share is like buying part of the business. Just like before buying an antique, you would judge the value of the antique and also anticipate how much value it would gain after a few years. Before buying share, you should to do enough homework to learn whether the business have its potential in the future.

Warren Buffet says "Invest in only what you can understand and analyze". In my opinion, that is the key that differentiate gambling and share trading.

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