More broadly, the following are the major key points that differentiate speculation on commodity futures markets from gambling:. While gamblers create risk for the purpose of betting, speculators do not create new risks but rather, absorb existing risks from others in the market. Speculators thus fulfil a socially useful function, allowing others, who are less able or willing to take on risk, to lay off excess risk.
For example, after harvest, farmers want to be able to sell their goods at a fair price; but consumers are not able to buy all of the harvest and store it during the year. Speculation adds value, and eventually supports the growth of an economy. This could concern absolute prices e. Gambling involves a game of chance or luck with a lot of odds against the gambler or player to win make profit.
But while gambling is built on hope, speculation is built on education. It involves taking a calculated risk and conducting research before engaging in any financial investment. A speculator buys or sells assets when he believes the potential profit is worth the amount of risks. A speculator is ready to take a risk in expectation of moderate or higher returns in a usually short period, having at the back of his mind that he can lose in fact, a good speculator knows that most of the time, he will actually be wrong in forecasting where the market will go.
In contrast, a gambler is ready to risk his capital on a bet relying mainly on luck. Gambling therefore is for high risk takers, ready to lose their original investment. Foresight is the foundation for making speculation decisions. Speculation proper is based on scientific knowledge of business conditions, studying of an existing trend and proper forecasting. Speculators are by nature cautious. Gambling is totally a work of chance, undertaken blindly and ignorantly without much prior thinking.
There is no objective knowledge of business conditions under gambling. In recognition of the public benefits of speculation, in most jurisdictions, there is little or no legal restriction on speculation in foreign exchange and commodity futures markets.
Gambling on the other hand is restricted in most countries. It is true that this can lead people who otherwise would gamble on horse racing or in casinos to bring their gambling appetite to futures markets; thus, futures markets in countries where gambling is restricted do have a gambling element.
But except in rare cases, this does not adversely affect the performance of futures markets. In conclusion, speculation is not gambling. It is a legitimate, socially useful activity that regulators should not attempt to ban, but rather, to promote — by helping make investors more aware of the portfolio benefits of speculating in futures markets, and by helping to make them more financially literate.
Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Speculation and gambling are two different actions used to increase wealth under conditions of risk or uncertainty.
However, these two terms are very different in the world of investing. Gambling refers to wagering money in an event that has an uncertain outcome in hopes of winning more money, whereas speculation involves taking a calculated risk in an uncertain outcome. Speculation involves some sort of positive expected return on investment—even though the end result may very well be a loss.
While the expected return for gambling is negative for the player—even though some people may get lucky and win. Speculation involves calculating risk and conducting research before entering a financial transaction. A speculator buys or sells assets in hopes of having a bigger potential gain than the amount he risks. A speculator takes risks and knows that the more risk they assume, in theory, the higher their potential gain. However, they also know they may lose more than their potential gain.
For example, an investor may speculate that a market index will increase due to strong economic numbers by buying one contract in one market futures contract. If their analysis is correct, they may be able to sell the futures contract for more than they paid, within a short- to medium-term period.
However, if they are wrong, the investor can lose more than their expected risk. Converse to speculation, gambling involves a game of chance. Generally, the odds are stacked against gamblers. When gambling, the probability of losing an investment is usually higher than the probability of winning more than the investment. In comparison to speculation, gambling has a higher risk of losing the investment.
For example, a gambler opts to play a game of American roulette instead of speculating in the stock market. The gambler only places their bets on single numbers. However, the payout is only 35 to 1, while the odds against them winning are 37 to 1.
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