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Certificate in Stock Market and Equity Research

Hanumant Dhokle

1.8 Investment ,Speculation And Gambling

How Investment , Speculation And Gambling are not the same!!

There is often some confusion between the terms investment, speculation and gambling. This confusion is often linked with investments made in the stock market. Investing is NOT gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a ‘hot tip’ is essentially the same as placing a bet at a casino.

A ‘real’ investor does not simply throw his money at any random investment. S/he first analyses the situation. If there is a reasonable expectation then only s/he invests.

Many people believe that certain investments are speculative in nature. Are they? An investment may be said to be speculative in nature when the investor takes a position on the timing of making the investment and exiting from the same. The time horizon may be as short as a day or sometimes several weeks. Investments are deemed to be speculative because there is usually no firm basis other than a hunch or intuition for making that investment decision.

Examples of such speculative investments include buying and selling shares in what is called an intra-day trade. Mr Tradewallah may buy a share in the morning when the market opens at say Rs 176 and hope to sell it by the end of the day at Rs 188. Since nothing fundamentally can explain this investment decision, this may be speculative. There is the possibility that Mr Tradewallah has tracked the performance of this stock or has received a tip from Mr Brokerbhai and has taken this decision. Even in such a case, the investment is speculative. If the share finds buyers at Rs 188 or more, the speculation has been profitable. However if the price falls and Mr Tradewallah has to exit i.e. sell the share at a lower value than his purchase price, it is speculation that results in a loss.

What is the difference between investments and speculation?

The main differences between investment and speculation are listed in the table below:

Investments Speculation
• It has a longer time horizon • The time horizon is short
• Tries to strike a balance between risk undertaken and the expected return • Assumes a higher risk in anticipation of higher return
• Can result in consistent or regular returns • Is expected to deliver quick returns
• Usually a planned activity • Usually unplanned and impulsive
• Is tailored to suit an individuals needs • No basis

Some uninformed people compare investments in the stock market with gambling. It is not at all true. Gambling or betting is more to do with taking a guess at the probability of an event. For example, you want to bet who will win the cricket match. If there are only two teams, then the chances are 50:50. A coin has only two sides and here also the chances are 50:50, either head or tail. Therefore, the probability of head or tail is 50 per cent. It means that if the coin is tossed for a very large number of times - say 10 times - there will be 5 times when it will be heads and an equal number when it will be tails. However, if someone takes a guess on whether it will be heads or tails when the coin is tossed eight times, it is not possible to predict the outcome. In this case the outcome will be a result of gambling, especially if there is payout involved.

Investments Gambling
• Made with a larger time horizon • Made at the spur of the moment
• Tries to strike a balance between risk undertaken and the expected return • Is risky and not possible to balance risk vs returns
• Can result in consistent or regular returns • Unplanned or impulsive action
• Usually a planned activity • Is tailored to suit an individuals needs
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