Investment, Speculation and Gambling: How are they different?


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.