Investment
Investment can simply be defined as the act of investing cash or monetary instruments for a future return. It consists of two major components; Time and Risk. As defined previously, one makes a certain investment in the present for some uncertain return in future.
Objective of Investment
- Maximize Current Income: This objective focuses on current yield over other factors. It is typical of people who must rely on investment income for part of the entire livelihood.
- Preservation of Capital: It means the currency value of the portfolio should not fall. Investment assists in preservation of capital by balancing the portfolio. Also, investment prevents potential for declines in the overall value of the portfolio by maintaining the tolerable limits.
- Reasonable current income with moderate capital growth: Investors make investment with a calculated benefit in the form of capital gains and maximization of income is assisted by the capital gains in the investment.
- Long-term Capital Growth: Another objective of investment is long-term perspective of capital growth. Investors who do not require returns for meeting their living expenses tend to be involved in investment for a longer time period. This also means, long term perspective holds a greater degree of risk in the portfolio.
- Aggressive Capital Growth: Some investors are keen to make aggressive investments with the objective of a potential growth. Therefore, many investors invest, with considerable investment analysis and management , to riskier investment.
- Tax-Advantage Investments: Investment instruments have different tax considerations. Some are tax-free and some are tax-sheltered, therefore, Investors are attracted to make investment to benefit from such provisions.
Speculation
Speculation involves investment but has a short-term perspective but higher stakes of risk and return. In speculation, investors maximize the return by buying and selling of financial instruments. Delivery of securities is least important in trade. In speculation, there is calculated risk in an uncertain outcome.
Gambling
Gambling is the act of playing for stakes in the hope of winning. Unlike speculation, gambling is all about cashing money for an event with uncertain outcomes in hopes of winning money.
Characteristics of Gambling
- Gambling absorbs all other interests.
- In gambling, gamblers show consistent optimism without any positive result.
- Participants never stop while winning.
- In gambling, gamblers risk more than one can afford.
- In gambling, gamblers seek and enjoy a strange excitement from gambling, a combination of pleasure and pain.
Difference Between Investor and Speculator
| Basics of Distinction | Investors | Speculator |
| Planning Horizon | An investor has a relatively longer planning horizon. His holding period is usually at least one year | A speculator has a very short planning horizon. His holding may be a few days to a few months. |
| Risk Disposition | An investor is normally not willing to assume more than moderate risk. One rarely considers high risk. | A speculator is ordinarily willing to assume high risk. |
| Return Expectation | An investor usually seeks a modest rate of return, which is commensurate with the limited risk assumed by investors. | A speculator looks for a high rate of return in exchange for the high risk borne by him. |
| Basis for Decisions | An investor gives greater significance to fundamental factors and attempts on careful evaluation of the prospects of the firm. | A speculator relies more on hearsay, and market psychology. |
| Leverage | Typically an investor uses his own funds and avoids borrowed funds. | A speculator normally resorts to borrowings, which can be very substantial to supplement his personal resources. |
| Source of Income | Source of income for investors is earning from enterprise. | Source of income for speculators is the change in market price. |
Difference Between Investment and Gambling
| Basis of Distinction | Investment | Gambling |
| Duration | Result of investment is known after a longer period of time. | Gambling is very short and the result is instant and quick. |
| Purpose | Rational people invest for income and return not for fun. | Rational people gamble for fun, not for income. |
| Risk Taking Capacity | Investors are risk takers as well as risk avoiders, considering the situation an investment instrument. | Gamblers are mainly risk takers. |
| Legal Aspect | Investment and actions are under the provision of laws. | Gambling is not regulated by any kind of laws. |
Reference
- Security Analysis and Portfolio Management, Thakur Publishers Chennai
- EDUCBA