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Although some investment purists might vote for opening the stock market just one day each year and on that day all buyers and sellers would transact business, the lack of daily liquidity would likely do more harm than good for the capital markets. Furthermore, despite its negative connotation, it can be argued that some types of speculation are, in fact, socially redeeming.
Carret shared the same opinion. Even Graham in The Intelligent Investor came to accept the necessity of speculation. More than that, some speculation is necessary and unavoidable. Lacking clearly understood boundaries, individuals are wandering aimlessly back and forth between the worlds of investing and speculation. And herein lies the danger. The stock market is now dominated by a newly evolved species, the investulator — defined as an investor who unwittingly acquires speculative habits without realizing it.
Although more study is needed, it is highly possible being an investulator is the reason why so many individuals perform badly in the stock market. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public.
Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against. All posts are the opinion of the author. Tags: Benjamin Graham , Investment vs. Robert G. Hagstrom has more than 30 years of investment experience. To me, speculating has to do with the notion of buying something with the idea that you will trade it to someone else as soon as you can realize a favorable price , while investing would imply a willingness to own that something for an extended period of time without worrying much about the short run or temporary impairments of capital.
A speculator on the other hand seek returns from pure price appreciation. Also in my opinion, an investor sees the stock as a business, while a speculator sees the stock as a ticker symbol. Future income from the asset is considered in the pricing. So that means speculators are also investors? Most people buy BRK shares in the hope that their value will appreciate.
Does that mean buying shares in BRK is speculation? This works for me. A speculator has the same motivations as a house flipper while an investor is like the house buyer who intends to pay off his mortgage. As for me I spend more time speculating but make more money investing. If I can be forgiven I like to use a poker metaphor to describe the difference between investing and speculation. For me investing is where you are dealt a good hand and slowly increase your stake as the hand improves, seeing how the other players react and how the cards are played, speculation is more a bluff, you are dealt a hand and you can take a guess at how good it may be but you cannot see any future cards, however, you bet large on the chance of a big win regardless of the uncertainty.
A good poker player investor much like in the words of de la Vega, plays a mixture of the two, a mixture of risky bluffs and calculated less risky play. This is perhaps the most important topic of out time. Many times, the value of the business diverges sharply from that of the market…witness the period dot com runup as an example. If you were the holder of a pension asset during the period, your interests will ill- served by money managers chasing an index so as not to underperform and lose clients.
Another way of saying this is to look at vanguard- a firm which indexes for a living. The other comments had some great thoughts as well. Using time span to differentiate between investing and speculating does not capture the essence. The difference is semantic. Investing contains a component of speculating, and speculating contains a component of investing.
The main emphasis in investing is on the value of the assets underlying the investment with the expectation that it will create a desired return i. On the other hand, the main emphasis in speculating is on the price fluctuations with the expectation that it will create a desired return i. Investing is the process of sacrificing the present value of a good be it cash, time or some other type of asset for it to multiply by the underlying growth of an ongoing or future opportunity be it a project, a stock or asset with solid economic fundamentals and approximately measurable risk obtained through thorough analysis and rational behavior.
Speculation is also the sacrifice of the present value of an asset to obtain a benefit from the growth or losses and loss is key of an ongoing or future opportunity. Speculation can or cannot be based on solid fundamentals, thorough analysis and rational behavior. Speculation can have out sized returns or losses due to the uncertain nature of the underlying opportunity, it seeks to exploit volatility.
Since short term volatility tends to be smoothed over time, speculation has a smaller time window. Games of chance are gambling; games of skill are speculating; and games of strategy are investing. The best way to understand this is to look at the definitions. Investors, like Warren Buffett, want to find the underlying value of a company. He cares about the underlying demand of buyers and sellers in the stock. He is looking at the beauty-contest aspect: will people like the stock and bid it up or not.
Focussing on the time frame or the intention takes attention away from a crucial and often forgotten part of the process: The need for someone to take you out of your transaction. I think that if your plan involves eventually selling your asset to someone else, whether that is in 8 seconds or 30 years, then you are speculating, not investing.
They operate on luck, confidence, and Hugo Boss. Those things disappear in that order, but usually they have feathered their nest, not by making a profit for themselves and their clients but by the sure and simple way of taking a commission. The only way to invest is to invest in yourself and your immediate family. That way has been lost to most, due to the discount people place on future consequences.
One could go on and on, but I find it sufficient to say that no one knows what is going to happen in the future, and the farther one sttempts to speculate, the more chaotic are the predictions that any modelling used up to now have supplied. The distinction becomes especially blurry when you consider a casino owner.
It seems clear that owning a business like a casino is a long-term investment. The fact that the odds are in his favor make it seem less speculative. But then how is he any different from the speculative computer with the odds in its own favor that makes thousands of trades per day? Liquidity is the key, in my opinion, to distingusihing between investment and speculation — the source of the liquidity. If we are relying upon the contract and for example collecting the coupons and principal of a bond, the source of liquidity is the obligor under the contract.
If we are relying upon sale of the asset in a market, this is speculation. We are, after all, uncertain that the market may exist or that the price will prove satisfactory. This also delivers a time dimension and shades of grey between these — in general the longer we hold an asset the more income is non-market.
I have written a number of articles in the past year on this — happy to send them to anyone who would like to read them — drop me an email at: con. Investing is the relentless process of translating and refining tacit knowledge into a distinctive and unique investment framework or mental model that is scalable beyond one single person and adaptable in different relevant contextual situations, particularly in dealing with what we do not know. Investors write with a framework as the north star to guide and navigate the marketplace jungle where dangerous animals, poisonous creatures and alluring sirens lurk at the corner.
Speculators never bother to write. Investors care deeply about ideas and research. Investors have an instinctive longing to weave outside our own skin some reflection of our mind. This article worthy for the students who are studying finance and for the people who are somehow connected to stock market. It gives a basic understanding of investing and speculation in a well defined manner.
I think for the most part the difference is that investing consists of investing sum X for a reasonably well-known, predictable return Y: whether Y is coupon payments from a bond, dividends from a stock, royalities from an oil well, rent from real estate. Speculation is purely price-driven, without expectation that cash or value will otherwise transfer to you from the investment. So in that context, the vast majority of participants in the stock market, including most mutual fund and k participants, are purely speculators.
A situation seemingly confusing or complex likely means you have it wrong. Truth is usually pretty simple. It is one of several semantic distinctions we have lost — including journalism vs propaganda in recent decades. As an equity buyer you do not own the retained earnings. You have the right to sell your security and you have any dividends or yield declared for shareholders. The dividends are your return on your capital investment. No dividends, no investment.
I have set this out in dozens of conversations over the past five years and written it in similar quantities of web postings. I get that the industry does not want its retail customers to get this distinction. And many of those same customers do not want to think they are speculators, speculating on speculations. In many, unfortunately were shocked at their security value declines. Few understand they were all in speculations. Robert, above, got it right about Buffett — he is a hypocrite investor, failing to provide anything more than a speculation to his capital suppliers.
None have dared do it. The media is part of the cool-aid! What is not to like about buying more yield for less? In the real world who ever invests would invest by considering the possibilities of all risk factors and would form a strategy at least to safe guard the principle amount and to earn a better return i. Speculation: A part of investing, where the investors turns out to be speculators and try to dispose their investments very frequently irrespective of the situation demanded means regardless of the occurrence of the typical phases mentioned in the definition of Investing.
Investments in an economy whose markets are informational and operationally efficient and with no country risk and no exchange risk would let people to be investors with not churning their investments, if not they are speculators. I like the distinction between speculation and gambling.
Gambling is when a person places a bet without knowing the odds of winning. Speculation is when a bet is placed only when the odds of winning are known. At the roulette wheel, I can perfectly calculate the odds of winning. Playing roulette is gambling; there is a percentage chance of winning and losing. Owning the casino is investment; over the long term, the house always wins and pays a dividend to its owners. As will be discussed in this paper, there is a fair bit of truth to these distinctions.
Examples of speculation are:. The extent to which financial speculation is similar to gambling is the extent to which it may have similar addictive and harmful aspects. The primary purpose of the present paper is to identify the similarities and differences between gambling, speculation, and investment by a review of both their conceptual and empirical relationship.
Aside from the academic value of this investigation, the overlap between these activities has important clinical implications. Although problem gambling is a well-recognized entity, the contribution of speculative financial activity to problem gambling is not well researched, and very little is known about problematic financial speculation as a potential behavioral addiction in its own right. The first part of this paper consists of a comprehensive analysis of the conceptual similarities and differences between gambling, speculation, and investment.
The second part of the paper involves the identification of all articles speaking to their empirical relationship and a summary of these findings. A two-stage search strategy was used to identify relevant articles. As a significant percentage of gambling-related literature is contained in non-academic sources, this literature search was supplemented by a search of gambling-specific databases:.
The second part of the search strategy involved checking the reference list of all relevant articles to identify other potentially relevant articles. There has been less consistency in the definitions proposed for speculation. Nonetheless, there is general agreement that compared to investing, speculation usually refers to financial market activities that tend to be shorter term, higher risk, with higher and lower gains and losses, and with a primary focus on making a monetary profit from price movement without regard for the fundamental value of the asset.
These above articles also contain diverse opinion concerning the attributes that differentiate gambling, speculation, and investment. The remainder of this section will review these attributes, as conceptual clarity can be advanced by a thorough understanding of how these activities are best differentiated.
The attributes that are most commonly invoked as differentiating gambling, investing, and speculation are: the types of activities and instruments used, time frame, level of risk, positive or negative expected return, and role of chance versus skill. Less commonly invoked attributional differences involve: whether an asset has been purchased or not, whether a stake has been made, whether there is a definitive outcome associated with a definitive event, and the economic utility of the activity.
Investment and speculation generally involve a set of activities and instruments quite distinctive from gambling activities. Gambling typically involves the purchase or participation in lottery tickets, scratch tickets, bingo, horse racing, sports betting, private wagers, electronic gambling machines slots, video lottery machines, pokies, fruit machines, and fixed-odd betting terminalsand various classic casino table games e.
In contrast, investment and speculation are typically associated with the purchase of GICs, bonds, stocks, commodities, currencies, real estate, derivatives, and collectibles. One is lottery-linked savings accounts and premium bonds. Another is financial indices wagering. This is when a person places a bet on the direction of a financial index e.
When this activity was eventually made illegal it was put into the gambling section of most legal codes. Most countries not Australia, Malta, Cyrus, or the Netherlands have also deemed this activity to be gambling, and therefore do not subject the profits to taxation the United States does tax gambling profitsunlike capital gains on financial markets which are subject to taxation Rayman, It is more difficult to separate investment from speculation on the basis of the instruments and activities engaged in, although GICs and bonds tend to be associated with the former, and derivatives with the latter.
Stocks, commodities, currencies, real estate, and collectibles can be either investments or speculative depending on the specific risk profile of the instrument. Most forms of investment are held for a period of months or years. In contrast, in most forms of gambling the outcome is known within just seconds scratch tickets, electronic gambling machines, and casino table gamesminutes bingo, horse racing, kenoor days i.
However, while this is a fairly strong distinction, there are some forms of sports betting with much longer horizons e. The time frame for speculation is quite variable depending on the type of activity. Day trading and high-frequency trading involve a time frame of seconds, minutes, and hours whereas penny stocks, shorting, options, and futures generally have time frames of weeks, months, and sometimes years.
For example, betting on the heavy favorite in horse racing or sports betting confers both low risk and low return. Investment vehicles such as GICs, bonds, mutual funds, and blue-chip stocks tend to entail low risk. In contrast, speculative activities such as day trading, penny stocks, shorting, and options and futures tend to be high risk, although the overall financial risk can sometimes be mitigated when these high risk vehicles are hedged with an offsetting position or contained in a more diversified portfolio.
Risk is related to expected return. Investments in the form of GICs have positive expected returns as long as the financial institution offering the GIC continues to exist. In contrast, virtually all commercially provided forms of gambling are designed to have a negative mathematical expectation over time for the player e.
However, this is not the case for all forms of gambling. Sports and horse race betting, card counting at blackjack, and person-to-person games e. This mixed pattern of returns in gambling is not that dissimilar to the mixed returns with speculation. It is also worth noting that there is a significant difference in the variability of returns for gambling versus investment and speculation, as commercial gambling has a precise and mathematically determined negative return, whereas both the size and the direction of the month-to-month and year-to-year changes in financial markets are much more variable and uncertain.
However, as mentioned earlier, while randomness is a central feature of many gambling games e. What many people fail to realize is the central role that chance also has in the financial markets. Two important corollaries of efficient markets are that a day-to-day directional changes in stock valuation are largely independent of the previous valuation i.
Although not often mentioned as a distinguishing feature, asset purchase is actually one of the most distinguishing features of investment versus gambling. By its very definition, investment involves creation or purchase of an asset, with financial gains or losses being due to capital appreciation or depreciation of the asset.
Some forms of speculation involve purchase of an asset i. One example is an options contract that gives someone the ability to purchase or sell an asset but does not oblige them to. Some types of futures contracts also do not involve purchase of an asset e. Although buying futures contracts usually involves the future acquisition of an asset, futures contracts are often resold for a profit or loss before physical delivery of the asset actually occurs.
It is notable that up to the s futures contracts for commodities and stocks in North America were unenforceable and sometimes illegalas they were legally considered wagers rather than contracts due to the fact that a physical delivery of an asset was not required Hazen, ; Kreitner, Finally, with respect to penny stocks, it is questionable whether ownership of stock in a company that itself has little or no assets actually qualifies as purchase of an asset.
All forms of gambling involve the staking or proffering money or material goods. In contrast, the asset is never explicitly staked in investment. Similar to gambling, most forms of speculation can be construed as staking material goods i. All forms of gambling have a definitive outcome associated with a definitive event. In contrast, there is no specific point in time in which there is a definitive outcome or event associated with investment.
In some situations, the investor may not have any intent of ever selling the asset. Some forms of speculation do not have a definitive outcome associated with a definitive event. Penny stocks are an example.
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Operations not meeting bloomberg wikinvestment requirements. A speculator has no emotion. They are risking their principal. PARAGRAPHBy closing this banner, scrolling this page, clicking a link securities for earning money from long term investment to know. Follow him on facebook or. The people who are interested income tax, goods and services investment is good or bad, price differentials are called as. They always have an escape these characteristics decide whether the tax GSTcompany law they are as follows. Return Expectations : Profits from price changes 2. He writes about personal finance, that distinguish specualtion from investment, they are as follows:. Do not buy unless the attached to the stock.readers from accepting the common jargon which applies the term. “investor” to anybody The distinction between investment and speculation in common stocks has pubs/currencypricesforext.com, currencypricesforext.com, and www. Operations not meeting these requirements are speculative.” Despite being the “dean of security analysis,” Graham's definition left readers. investment difference gambling between pdf reader speculation and. Peer knowledge currencypricesforext.comce between speculation poker ordinea culorilor a.