Investment, Speculation & Gambling....!!!

Investment, Speculation & Gambling, these words are very

common in the stock market especially the first two, but the
fact is that most of us do not understand their actual meaning
and at times we use them interchangeably. Now let us
understand these terms keeping in mind the market.
 
Investment

The term investment has many facets and is used in many fields
like management, finance, economics etc. but we will be strictly
sticking ourselves to the meaning that is apt keeping in mind the
financial market.
 
Warren Buffet one of the most respected investors all around the
world and CEO & Chairman of one of the world famous
Investment Company Berkshire Hathaway has opined that if a
person invests money in the market with even a hint of thought
of selling it once the price rises is not at all an investment. 

When you ask any person to define the term investment one of
the most common answer would be that an investment is nothing
but to put your money into something. 

One of the best definitions of investment is given by Frank K

Reilly and Keith C Brown. According to them investment is
defined as Current commitment of resources for a period of time
in order to derive future payments that will compensate the
investor for;

      Time for which the funds are committed

      Expected rate of Inflation
      Uncertainty of future of payments
Or it can be defined as the trade-off of present consumption of
money for higher consumption of money in the future this is
called as saving and the activities that we carry out to increase
the savings is called as investment.
 
For example; a person purchases shares of Reliance companies
worth 10,000 intending to hold them for a long term and
expecting at least Rs 50 dividends on them.
 
An investment is said to be genuine if it has been made keeping
in mind certain expected rate of return in mind.

In the above case if that person had just taken the reliance
shares without expecting the dividends then it is not a genuine
investment.
 
There are three things that compensate the investor collectively
form the Expected Rate of Return such as;
 
 Time
 Inflation
  Uncertainty

The first one is the time for which the funds are committed.

Let’s think that Mr. X has lot of excess money and he does not
know what to do with that so he just digs a hole on the floor of
his home and buries all the excess money for two years and after
two years he takes the money and it should not be surprising for
him to find out that the amount has not changed.

It is just to show that if he had invested the same thing like

markets or banks or post offices then he would have received
some rate of interest and this is called as pure rate of interest.
 
Second one is rate of inflation.

Just think that you have 100 rupees now in your pocket and with
that you can buy 2 kg of rice but instead of that you choose to
invest it in market for one year.

There is something called as inflation which changes the

purchasing value whenever there is fluctuation in its value so if
the inflation rate is 4% per annum you would definitely expect
the investment that you have done in the market to give you a
return of 4 rupees so that you can buy the same 2 kg of rice after
one year.

This is called as nominal rate of interest and it is the sum of pure

rate of interest and compensation for inflation.
 
The third and the last one is uncertainty of the future payments.

The payments that we are expecting are uncertain hence the risk
element is involved and the investors are ready to take that risk
and in return they expect something called as risk premium.

Risk premium is nothing but the risk free returns plus extra
returns for risk.            
 
Speculation

Speculation as in Investment has many meanings but when it is

used keeping the finance in mind means that the money is spent
or lent in the market to purchase instruments without much
knowledge.

Speculation is defined as buying and selling the instruments

without taking their delivery.

It is also called as non-delivery based transaction.

Speculators are those who have no exposure to underlying asset.

The speculators are trading for very short duration of time and
their main motive is to earn profits as there are changes in the
prices within a short duration of time.
 The speculators are exposed to risk as they are employing their
assets without much study and in the process provide liquidity in
the market .

If you go by the definition given above then the day trading that
happens in the stock exchanges are definitely nothing but
speculation as there are so many people buying and selling the
shares as there are changes in their prices.
 
For example; a person buys 50 shares of BHEL at 3000 rupees
and as a result of market fluctuations their price rises to 4000
rupees just in few minutes then the person sells off those shares
to get a profit of Rs.1000 this is known as speculation.
 

Gambling

Gambling is an artificial activity which is solely based on the

intuition and it is an artificial activity and is not at all dependent
on the economic activity.

The gambling does not involve any kind of analysis. The money
is just employed and the chance of winning in that particular
gamble is very less.

The gambling is of very short period when compared to

speculation and is solely based on the intuition.  
 
For example; a person putting all his earnings in horse race or
in a casino or in the cards is said to be taking a gamble as he
doesn’t know if he is going to win and there are very less
chances of him winning that.