When it comes to money, we just want ways to multiply it. While we can choose to invest our money to make it smartly grow, but whilst driving growth - the key is to understand the difference between investing, gambling and growing your money.
Therefore through the article we intend to focus on the difference between, these three aspects and why you should focus on investing your money, rather than gambling or speculating it away.
Investment can mean many things but particularly in the financial market, it means putting your money into something. According to the financial experts, Frank K Reilly and Keith C Brown investment is the current commitment of resources for some time to derive future payments that will compensate the investor for, time invested, expected rate of inflation, and uncertainty of future payments.
Example – Investor genuinely investing for the long term in a high revenue-generating company after proper analysis. He buys shares worth Rs 10,000 and expecting at least Rs 50 dividends on them.
When you talk about speculation in terms of the financial market it refers to making investments without proper or incomplete knowledge and information. Speculators always invest in short-term plans to leverage the price fluctuations that occur in a short period. Without having enough knowledge, the speculators tend to expose themselves to higher risks.
Example – Speculator who buys 50 shares of a company for Rs 3000. Now the price of the same shares becomes Rs 4000 due to price fluctuation. The person sells the shares and earns profits of Rs 1000.
Gambling is very much different from the above two as gambling purely depends on the intuition or instincts of the investor. The investor trusts his instincts and the sole basis that he employs his money in hope of winning that gamble to earn profits. However, the chance of winning that gamble is particularly very less. This gameplay is less of economic activity and more of an artificial activity which is played with instincts
Example – A person putting all his money in a horse race or casino is referred to as gambling. This is a gamble as the investment is not backed by any information or analysis and the chances of winning are unknown.
|
Particulars |
Investment |
Speculation |
|
Time Horizon |
Held for long term. Ranging from 2 to 5 years |
Held for short span which is mostly less than a year |
|
Risk Levels |
The risk level is moderate |
Involves greater risk |
|
Deployment of Funds |
Fund deployment to accumulate wealth and generate extra income source for future |
Fund deployment to leverage daily price fluctuations occurring in the short-term investment |
|
Decision Criteria |
Company Analysis and understanding the fundamentals of the underlying asset |
Market trends, sentiments and news floating around |
|
Investors Attitude |
Investors have lesser risk appetite hence are cautious and conservative |
With higher risk appetite speculators are more aggressive |
|
Expectations of Returns |
Modest return expectations |
High return expectations |
The ultimate goal of investing, gambling and speculation is making more money and that too without losing any principal amount.
The risk involved in investment in financial instruments can be controlled as compared to gambling or speculating. This can be achieved by diversifying your portfolio by investing in different instruments like equities or mutual funds and in turn mitigating your losses.
In case of gambling, you either win or you lose. There is no way to prevent losses but you can certainly minimize it. The only way to do so is by sticking to a limited fund and not exceed your capital in the heat of the moment at any cost.
Speculation has higher risk than investing but lesser risk as compared to gambling. When speculating, the speculator is aware of the fact that the more risk he takes, the higher his potential gains will be and the higher the chances of him losing money.
The time factor plays an important role in money matters. In order to gain more, you need to consider the time you have to allocate for your money to gain pace.
Investing money in financial products is quite stable with reasonable returns over a longer period of time, and certainly more probability to earn profits. Hence while investing allotment of appropriate time horizon for the money to grow and mature is very essential.
With a small probability of winning, gambling is a time bound activity with no stability. The returns solely depend upon one’s luck and odds. Within minutes you might turn broke or become rich.
Speculation has uncertain growth. It may grant higher returns provided the speculators do not opt for a long period. It involves higher risks however with the right time horizon, one may be able to achieve good returns.
The money that you are using should be backed by a good set of knowledge. Handling money is tough and important task.
Investing is usually preferred more by cautious and conservative investors who analyse the fundamentals of the underlying asset and company.
Gambling is an art of randomness. It involves a number of permutation and combinations and usually opted by investors who are ready to lose original investment and are simply looking to have fun.
A speculation on the other hand requires a lot of background check. The decision is usually based on news, past-present performance and market sentiments. Speculators are usually aggressive and high risk takers.
In conclusion, all investors are advised to choose the method that best suits their risk appetite and in which they are comfortable the most. In investing knowledge and proper analysis increases chances for creation of wealth while in speculation the timing drives the boat and in gambling luck is a force to be reckoned with.
If you aim to generate wealth from the long-term investment the investor should have a proper fundamental knowledge of the company and the stocks. With analysis for a longer period of duration, an investor can create a corpus easily without any fear of exposing funds to any kind of risk. Investing is a better approach and investors can yield a stable return over the long run. By investing secure their funds and have fair chances for wealth creation. Investment guarantees return as it is based on hours of analysis and research of the stocks and not merely dependent on instincts.
In conclusion, all investors are advised to choose the method that best suits their risk appetite and in which they are comfortable the most. In investing knowledge and proper analysis increases chances for creation of wealth while in speculation the timing drives the boat and in gambling luck is a force to be reckoned with.
If you are an aggressive investor with a high-risk appetite who wants to try their hands at speculations remember that you are speculating and not investing. Your techniques should be sustainable in the longer run. Do not expose yourself completely to speculations as it can harm you both financially and emotionally. Dedicate only a small part of your portfolio to speculations.
Investors yield returns with the safety of their investments and hence reach their decision cautiously only after a proper analysis. Whereas, speculators expect higher returns without any analysis and safety.
Open a Demat account with us and start your investment journey today!