Compare And Contrast Insurance Gambling And Speculation

• Compare And Contrast Insurance Gambling And Speculation Tax
• Compare And Contrast Insurance Gambling And Speculation Definition
• Compare And Contrast Insurance Gambling And Speculation Fees
• Compare And Contrast Insurance Gambling And Speculation Company

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. If you compare this definition to that of speculation, you will see that the central difference is the lack of 'commensurate gain.' Economically speaking, a gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertaken in spite of the risk involved because one perceives a favorable risk.

In financial jargon, the terms investment and speculation are overlapping and used synonymously. In investment, the time horizon is relatively longer, generally spanning at least one year while in speculation, the term may extend up to a half year only.

As per Benjamin Graham, an American economist, and professional investor, investment is an activity, which upon complete analysis assures the safety of the amount invested and adequate return. Conversely, speculation is an activity which does not satisfy these requirements.

The basic distinguishing point amidst these two is that income in the investment is consistent, but in the case of speculation is inconsistent. So this article makes an attempt to clear the differences between investment and speculation. Have a look.

Content: Investment Vs Speculation

Comparison Chart

Compare And Contrast Insurance Gambling And Speculation Tax

Definition of Investment

Investment refers to the acquisition of the asset, in the expectation of generating income. In a wider sense, it refers to the sacrifice of present money or other resources for the benefits that will arise in future. The two main element of investment is time and risk

Nowadays, there is a range of investment options available in the market as you can deposit money in the bank account, or you can acquire property, or purchase shares of the company, or invest your money in government bonds or contribute in the funds like EPF or PPF.

Investments are majorly divided into two categories i.e. fixed income investment and variable income investment. In fixed income investment there is a pre-specified rate of return like bonds, preference shares, provident fund and fixed deposits while in variable income investment, the return is not fixed like equity shares or property.

Definition of Speculation

Speculation is a trading activity that involves engaging in a risky financial transaction, in expectation of making enormous profits, from fluctuations in the market value of financial assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset by the probability of significant profit. Although, the risk is taken by speculators is properly analysed and calculated.

Speculation ca be seen in markets where the high fluctuations in the price of securities such as the market for stocks, bonds, derivatives, currency, commodity futures, etc.

Compare And Contrast Insurance Gambling And Speculation Definition

Key Differences Between Investment and Speculation

The basic difference between investment and speculation are mentioned in the points given below:

Compare And Contrast Insurance Gambling And Speculation Fees

1. Investment refers to the purchase of an asset with the hope of getting returns. The term speculation denotes an act of conducting a risky financial transaction, in the hope of substantial profit.
2. In investment, the decisions are taken on the basis of fundamental analysis, i.e. performance of the company. On the other hand, in speculation decisions are based on hearsay, technical charts, and market psychology.
3. Investments are held for at least one year. Hence, it has a longer time horizon than speculation, where speculators hold assets for short term only.
4. The quantity of risk is moderate in investment and high in case of speculation.
5. The investors, expect profit from the change in the value of the asset. As opposed to speculators who expect profit from the change in the prices, due to demand and supply forces.
6. An investor expects the modest rate of return on the investment. On the contrary, a speculator expects higher profits from the speculation in exchange for the risk borne by him.
7. The investor uses his own funds for investment purposes. Conversely, speculator uses borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which is not in the case of investment.
9. The psychological attitude of investors is conservative and cautious. In contrast, speculators are daring and careless.

Conclusion

At the end of this discussion, it can be said that both are different and should not be used interchangeably. Investors play a very crucial role in maintaining liquidity in the market but speculators too, play a major character in absorbing excessive risk and providing required liquidity, at the time when investors do not participate.

Compare And Contrast Insurance Gambling And Speculation Company

Pure Risk: There are only two possibilities; something bad happening or nothing happening. It is unlikely that any measurable benefit will arise from a pure risk. The house will enjoy a year with nothing bad occurring or there will be damage caused by a covered cause of loss (fire, wind, etc.). Predicting the outcomes of a pure risk is accomplished (sometimes) using the law of large numbers, a priori data or empirical data. Pure risk, also known as absolute risk, is insurable.

Speculative Risk: Three possible outcomes exist in speculative risk: something good (gain), something bad (loss) or nothing (staying even). Gambling and investing in the stock market are two examples of speculative risks. Each offers a chance to make money, lose money or walk away even. Again, do not equate gambling and investing on any other level than as both being a speculative risk. Gambling is designed to enrich one party (the house); the odds are always in its favor. Investing is designed to enrich all involved, the house that set up the 'game' AND those that chose to place money in the game - all participants with 'skin in the game' win or lose together. Speculative risk is not insurable in the traditional insurance market; there are other means to hedge speculative risk such as diversification and derivatives.