Investment vs. Speculation Vs. Gambling
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1 Investment vs. Speculation Vs. Gambling
2 Definitions Investment The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit There has to be a reasonable expectation of profit Speculation The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate Gambling Gambling is defined as staking something on a contingency The rewards are not inline with the risks
3 Coin toss game at 3 Casino s Roger s casino Fairy s casino Granny s casino You bet Rs 100 Rs 100 Rs 100 Correct call You get Rs 150 Rs 200 Rs 250 Incorrect call - You lose Rs 100 Rs 100 Rs 100 % of time you need to be right to break even On a great day (always right) On an ordinary day (right half the time) On a bad day (almost always wrong) 66.6% 50% 40% You make money You make money You make money You lose You break even You make money You lose money You lose money You lose money Rationally this is a Losing proposition Fair proposition Great proposition In summary Gambling Speculation Investment One is taking a chance, payoff is not in line with the risk The payoff is in line with the risks There is a reasonable expectation of profit
4 Investment vs. Speculation Vs. Gambling Gambling Speculation Investing Odds are Unfair (reward not proportionate to risk) Fair (rewards are proportionate to risk) Favorable (risks more than compensated by rewards) What should you be looking for What should be your ideal profile Having fun Good pay off Steady returns Have wealth and looking to have fun Have wealth and looking to increase it To succeed you need Luck Expertise in the business If you do very well (and are lucky).. Make a lot of money Increase your wealth significantly Looking to build wealth Fair understanding of business and common sense Will be do fairly well Can you lose money Yes Yes Yes In the long run you will Lose Break even Make small profit
5 Investment vs. Speculation Vs. Gambling examples Investing in equities Gambling Speculation Investing Investing in a Pharma company IPO as most recent Pharma IPO s had a great run up. Investing in a Bio tech company in the final stages of drug discovery and you being in the field believe it is promising Investing in top few companies in the Pharma sector as exports and local sales are growing well Buying land Purchasing land near a town as the price of neighbour got a great deal and because land prices always go up Purchasing land when you know from your reliable network that a large investment in building a highway is likely to come through Purchasing land near an SEZ, after the SEZ has been commissioned as you believe that as people start moving in the prices are likely to appreciate Buying residential property Buying a house that has recently come on the market as the house prices in the city always go up Buying a beach front property near a developing as you have studied trends in other markets where such property values appreciated Buying property in an area which is land locked and the rental yields are very good and historical data points to a decent appreciation in price
6 FAQ. I am looking to build wealth how can I speculate and gamble To speculate Earmark a small portion of your investment funds for speculation Ideally you should speculate in the area of your expertise Expect to break even To gamble Earmark a portion of your expenses for gambling (should not be your investment funds) Gamble in areas where you will have most fun Expect to lose the money Your top priority should be to make sensible investments and build wealth
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