Bettors – people who gamble – know all too well that the odds can work in their favour. Knowing when to bet, and how much to bet, can turn a regular game of chance into profit. However, for some people, gambling can become an addiction. If you find yourself often losing large sums of money at the slots or the tables, you might want to consider other options.
The Mathematics of Gamble-Based Investing
The concept of ‘hedging’ was first introduced to us by mathematicians who wanted to make probability simpler. When you are investing, the stock market is essentially a gamble based on the bets of other investors and on the assumption that the stocks will rise in value. When you buy a stock portfolio, you are essentially betting that the price will go up. When it does, you make a profit. However, if the stock price drops, you have also lost money. As a general rule of thumb, you can expect to gain around 2% of your total investment with every year of stock ownership.
The Hedging Strategy
We all love to win, but if you are not prepared to lose either way, you might want to look into a hedging strategy. With this strategy, you are essentially betting a certain amount of money that the stock price will go up. To do this, you purchase a relatively inexpensive put option that allows you to sell the stock at a predetermined price should the price drop. For example, if you are considering a $100,000 investment, you might want to consider a put option with a strike price of $80,000. If the stock price falls, you can sell the stock at $80,000 and make a $20,000 gain. However, if the price rises above the $80,000 strike price, you lose only the $20,000 you put on the option.
The Risk of Taking On Too Much Risk
There is a significant risk in gambling, and that is risk of debt. If you are consistently losing at the tables, it might be good to consider reducing your losses or taking a break from gambling altogether. Ultimately, if you want to make money investing, you have to be prepared to lose some of it. The question is how much loss are you willing to take on? The answer to this question is simply risk management. People who want to keep gambling, but manage their risk effectively, will find that it is not such a bad addiction after all!