Difference Between Investment And Gambling In Tabular Form
Gambling, on the other hand, is a wager between two parties that depends on a particular outcome and results in a gain for one, and a total loss for the other. So essentially, the biggest difference between investing and gambling, is that when you invest your money, you are purchasing something of value. Many people do not differentiate between the following terms when they invest their hard-earned money in different asset classes, particularly in stock market and often get confused between; 1. Another key difference between the two activities has to do with the concept of time. Gambling is a time-bound event, while an investment in a company can last several years.
Many people do not differentiate between the following terms when they invest their hard-earned money in different asset classes, particularly in stock market and often get confused between;
1. Saving
2. Investment
3. Speculations
4. Gambling
We often use the word savings and investment interchangeably, while both are different and both are necessary to secure our future. Saving is done for purchases and emergencies while investment is being done for creation of wealth. I have heard from most of the people that they are savings for their retired life, we need to understand that if we are saving for our retired life we need to invest that money to create wealth. We need to allocate the money wisely between saving and investment, it depends upon behavior of each individual and allocation can be made accordingly. In general, we shall allocate equivalent of three to six months expenses for savings and any excess over it should be allocated for investment.
There is a razor thin differentiation between investment and speculations, in reality it depends upon our own behavior as an investor to differentiate between investment and speculation. Investment and speculative deals are generally done for real assets.
Investment can be defined as “The employment of funds to acquire certain assets after due diligence for mid to long period of time, with the objective of wealth creation and additional income in future”
Speculative investment can be defined as “The employment of funds to acquire assets for shorter duration of time to take advantage of fluctuations in prices of underlying assets”
However, Gambling can be defined as “The employment of funds for entertainment/fun with the chances of return depends upon probability of certain situation or events”. For example, deploying funds on horse racing can be defined as gambling.
Key differential of investment vs speculation vs Gambling is;
1. Risk Analysis and Risk appetite: Investor will generally rely on the fundamental analysis of financials and other factors which can affect the price of the asset class and their decision to invest in particular asset is based upon certain fundamental values associated with the asset. Investors do have long term risk and return perspective. While speculators generally rely on the flow of the wind without analysing any fundamentals. Speculators do take higher risk for expects higher returns in short period. Gambler risk entire capital on bet and relay mainly on luck. They are the highest risk takers and ready to lose original investment also.
2. Price of the asset: Investor does not look at the price of the asset rather it looks at the asset itself to determine the decision to allocate some money now to get some money back later on. Investor does not get influenced by daily fluctuations of the asset price, because his/her allocation of money decision is based on the intrinsic value of the assets rather then price. Speculators look at the price of the asset to allocate the money and they do get influenced by the daily fluctuations of the price of the assets, aim of the speculator is to get some quick reward. Gambling is based upon odds and bets are placed only on assumptions.
3. Time Horizon: Investors allocate money for a particular asset for longer period while speculators allocate money for shorter period, on the other hand gambler place bet for immediate gain.
4. Leverages: An investor allocates money from its own resources for investment while and speculators may also rely on borrowed money to allocate. This is applicable mainly to assets belongs to equity market. Gambler generally allocate their own money and place bet for entertainment or fun.
An individual’s approach towards investment identifies the individual either investor or speculators. If an individual is investing without fundamental analysis, only on the basis of market sentiments and certain news, for a shorter duration can be defined as speculative investor. An Individual who invests with proper fundamental analysis for longer period of duration can be defined as investor.
In conclusion, Investor will get stable return over a long run and I advise all my readers to invest wisely after proper analysis of the company to secure their hard money for fairly good chances for creation of wealth. If you are a speculator, make sure your entry and exit to the market is at right time and always be ready to higher risk of loss of original investment in worst circumstances. Gambling should be avoided always and in most of the cases gambling is not legal also.
Your approach determines whether you are investor, speculator or Gambler?
Most of the people who are participating in different asset classes like Equities, Commodities , Real estate or other asset classes don’t understand whether they are actually investor, speculator or gambler. It is very important to understand your own behavior as an investor because that will determine your success as an investor. People who create positions in Futures and options also believe that they are investing in futures but actually that is speculation. So it is very important to understand the difference between Investment, speculation and gambling.
Following chart will clarify the how investment and speculation are different.
From above chart it is very clear that investor and speculators have different approaches towards different asset classes like equity, bonds etc. Taking positions in Futures & Options or commodities for high returns over short term are the ways to speculate and investing in shares and mutual funds or buying Gold through ETF with a reasonable return expectation over long term are ways to invest in these asset classes. Now let us understand what is Gambling?
What is Gambling ?
Gambling is fundamentally different from investment and speculation in following respects.
Quick Outcome: Normally Outcome of gambling is know very quickly. The outcome of rolling a dice or the turn of a dice is almost known quickly.
Results don’t depend on Economic activity: Normally results of gambling are not dependent on any economic activity. For example when you create position in futures or commodities the prices of stocks or commodities are some where dependent upon economic activity but when you play card and bet on that the outcome of that doesn’t depend upon any economic activity.
Lack of significant Economic benefit: Generally gambling doesn’t provide significant economic outcome. Whereas, investment and speculation can provide significant economic outcome.
Gambling should be for fun : Normally rational people do gambling for fun and not for making money.
So it is clear that gambling should be more done for fun and not for making money.
Investor or Speculator: Who are you?
Now identify yourself whether you are Investor or Speculator?, from your approach towards investments. If you invest with a very short horizon, without looking at fundamental aspects and have a very high return expectation then actually you are a speculator and not an investor.
Your approach and not instruments only decide whether you are investor or speculator : it is not necessary that if you are investing in shares and stocks then you are an investor, because If you don’t look at fundamental aspects of companies and have a very high return expectation over very short period of time then actually you are an speculator and not an investor.
Get ready for the risk and return or change your approach : If your approach is that of speculator and you want to remain the same, you should be ready for risk and return of the same. You may make heavy profits in short term with a little investment and you may also lose your capital within short term. Whereas in case if you adopt an approach of investor, you may make reasonable returns but relatively you are in much safer position.
Conclusion: To conclude with, there is significant difference in the approach of an investor and speculator. Speculator may make very good returns over a short term period once or twice, but over long term a speculator normally loses or doesn’t make much returns. So it is better to control your greed factor and become investor.
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Difference Between Investment And Gambling In Tabular Format
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