Beware Of This Dangerous Addiction

Do you happen to know someone who have used margin accounts – trading accounts where brokerages lend money to the account holders – to buy into the trio of Blumont Group (SGX: A33), Asiasons Capital (SGX: 5ET), and LionGold Corp (SGX: A78) near their peak and then falling into debt when those stocks eventually crumbled in a matter of days?

Some might mistakenly call this investing, but the correct term to use is trading. There is a fine line between trading and gambling in the stock market. And dangerously, just like how gambling can become an addiction, so too can trading.

A trading addiction, in a pattern similar to all other addictions, feels exciting – nay, energising – at the beginning. But, if we are not careful, things can get out of control very fast.

What is trading?

Trading differs from investing with its much higher frequency of buying and selling. Traders employ technical analysis and special trading softwares to try to profit within a short period of time, which can even be as short as a few seconds. In trading, high leverage is also commonly used through a margin account.

Why a trading addiction is dangerous

I would hazard a guess that most trading courses make the whole act feel like an easy venture. Yet, it’s likely that most people would end up losing money on their trades, judging from statistics that show how the more one trades, the more one loses. As such, trading can become risky and speculative.

Secondly, leverage, which can be employed liberally in most traders’ trading activities, can be a real double-edged sword. We witnessed just that during the the Global Financial Crisis of 2007-2009.

What are the symptoms?

Generally, when traders makes their first profit, it would increase their confidence and the size of their subsequent trades. But, if the trading wins are just due to dumb luck, soon, the losses will mount. The real danger comes if they constantly try to double down on each loss in a bid to recoup their investments.

If you ever spot these systems in someone (it could even be you!), it’s likely that he or she may have fallen into a trading addiction:

  • Neglecting everything and everyone else, with a sole focus on trading
  • Getting frustrated and angry all the time
  • Borrowing money from people to pay off trading related-debt

Cold Turkey

All addictions can be cured. If you ever spot someone with a trading addiction, it is best to seek professional help (from say a gambling counselor), for him or her.

Foolish Bottom Line

Whether we are a believer of technical or fundamental analysis, we can all fall into a trading addiction. So, how can we prevent ourselves from falling into an addiction in the first place? I believe we should try everything in moderation first, and always experiment only with capital you can afford to lose.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.