We see a lot of known phenomena in our life that we cannot predict exactly. It’s called random experience.
For example, if we drop an object from a certain height and consider its volume, weight, shape, wind resistance, etc., we can know how long it will take to fall and where it will fall. This phenomenon is known as deterministic experience. If we flip a coin, on the other hand, we cannot know which side it will land on. Hence, it is known as random experience.
In general terms, probability is a study that measures the frequency with which a specific outcome is obtained when a series of random experiments with known and controlled characteristics are carried out. To study probability, all possible investigation results in question must be considered.
If the same coin is tossed a hundred times with the same impulse, on the same surface and without any change, it will land fifty times on one side and fifty times on the other. In this case, the probability cannot tell us which side the coin will land on. Still, it does tell us that there is a fifty per cent probability that it will land on one side or the other. For example, in the case of a die, each number has only a one-sixth chance of falling, so it is more difficult for the same side to be repeated several times.
Why do we need to learn about probability?
Probability theory is a valuable tool for predicting the frequency with which certain phenomena occur. It is frequently used in the exact sciences, such as physics or mathematics. With the passing of the centuries, the study of probability has become associated with statistics and finance.
How is probability used in finance?
In financial terms, the probability is “the fixed limiting value towards which the frequency of occurrence of an outcome tends to approach as the number of observations under similar circumstances increases”.
It means that, in the world of finance, the probability is associated with the recurrence of a specific outcome when analysing the same instrument or financial situation on a large scale.
Let’s take the example of currencies and dice and apply it to investment. As a result, we will better understand the handling of financial probability.
In the investment world, many experts measure the frequency of certain phenomena. Investors use these studies to analyse their potential deals better. So, suppose there is a study that reveals that a specific stock has a thirty-five per cent chance of going up. In that case, it means that it has a sixty-five per cent chance of going down, which tells us about a higher risk at the time of investing.
Generally, when an investment has more risk, its potential returns are higher. Probability studies help us determine precisely how much risk exists.
A similar phenomenon occurs in the stock market as in sports betting, car racing or horse racing. For example, when you bet money on the favourite to win, the return is less than when you bet on the worst-ranked list. Likewise, the risk is more significant when putting money on the underdog since he is less likely to win.
What is financial betting?
Financial betting is a novelty in the world of online gambling, whose popularity has grown exponentially among gamblers in recent years. They consist of betting on whether the stock market, shares, indices or currencies will go up or down. You can find them on gambling sites not linked to Gamstop.
Some say that betting is based solely on luck, while others are certain that if we study complex algorithms or trends, “luck” will be on our side. It makes sense when it comes to traditional betting: sports, gambling, etc. However, in financial betting, the mental aspect is much more critical. While there is a chance component, being aware of how the markets are behaving, the fluctuations, and why they are fluctuating helps a lot when it comes to putting money in your pocket.
Here’s a simple example:
- Let’s suppose that intuition (or something else) tells us that the euro will finish the next day above the dollar.
- Then, we can place a bet in favour of the euro at the close of the day worth, say, ten euros.
- If the price is above the previous day’s closing price at the end of the wager, we will have won.
- Otherwise, we will have lost if it is below the last day’s price.
It’s straightforward and leaves less room for chance, a component that has some gamblers upside down, not without reason. But what is the difference between placing a financial bet and investing in the markets?
In the case of betting, the risk is generally not limited, especially in the case of binary options. In addition, the investment can be multiplied within seconds (but can also be lost). The profit is stipulated in advance; there is no room for big surprises. On the other hand, we can control risk through stop orders when we invest in an asset. Technical analysis is necessary to identify entry points, and dividends can be charged on the shares.
While it was once thought that financial betting was only for stock market freaks, now we can all make our little forays into this field. All we need to do is do a little research and educate ourselves before we start betting our money. If we do it right, we may end up making a good profit.
Several websites on the Internet will inform you about the ins and outs of this type of betting.
Probability studies allow us to predict, to some extent, investment behaviours, or at least the possible gains or losses in any given case. It is beneficial in deciding when and how to invest.
It is important to remember that the laws of probability are directly linked to the risks of loss. So that investments with low probabilities of success tend to be the ones that pay best if they are successful.
However, one should not lose sight of the fact that risk is a determining factor in investment choice. Therefore, it is not advisable to put wealth at risk in the hope of beating the odds or contradicting forecasts.
Appropriate investment risk will depend on the individual situation of each person and their specific needs. Proper advice and diversification of investments are therefore crucial.