Speculation vs. Gambling: An Overview
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 with an uncertain outcome. Speculation involves some sort of positive expected return on investment — even though the end result may very well be a loss. However, the expected return for gambling is negative for the player — even though some people may get lucky and win.
Speculation
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.
Gambling
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. So if a gambler bets $2 on a single number, their potential gambling income is $70 (35*$2) but the odds of them winning is approximately 1/37.
Key Differences
Although there may be some superficial similarities between the two concepts, a strict definition of both speculation and gambling reveals the key differences between them. A standard dictionary defines speculation as a risky type of investment, where investing means to put money to use, by purchase or expenditure, in something offering profitable returns, especially interest or income. The same dictionary defines gambling as follows: To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance; bet; wager.
Speculation refers to the act of conducting a financial transaction that has a substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense. Some market pros view speculators as gamblers, but a vigorous market is made up of not only hedgers and arbitrageurs, but also speculators. A hedger is a risk-averse investor who purchases positions contrary to others already owned. If a hedger owned 500 shares of Marathon Oil but was afraid that the price of oil may soon drop significantly in value, they may short-sell the stock, purchase a put option, or use one of the many other hedging strategies.
While speculation is risky, it does often have a positive expected return, even though that return may never manifest. Gambling, on the other hand, always involves a negative expected return — the house always has the advantage. Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one’s self or acting in a way to be socially accepted, which results in taking action in a field one knows little about.
Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, relying on emotion or a must-win attitude to create profits rather than trading in a methodical and tested system, indicates the person is gambling in the markets and is unlikely to succeed over the course of many trades.
How Do You Separate the Investor From the Speculator or Gambler?
An investor puts money into quality assets that are likely to produce stable, consistent returns; a speculator puts money into assets that are volatile with the hopes that the asset will spike in value and the speculator will profit; a gambler is playing a game of chance against bad odds with the house always having the advantage.
Is Investing A Type of Gambling?
Investing is different from gambling. Investing involves putting money into an asset with the expectation of seeing a return, while gambling is putting money on an uncertain outcome that is predicted to be negative, with the house likely to win.
Which Is Better, Investing or Gambling?
Investing has better odds over the long run than gambling for someone looking to see a profit. There are risks to both and you can certainly lose money on the stock market, but the stock market has historically appreciated, meaning if you’re well diversified and in it for the long haul, you can likely come out ahead. With gambling, it’s possible to luck out and strike it rich, but the greater likelihood is to lose money, potentially a lot of it, as the house has a mathematical advantage over the gambler. Also, the odds of losing increase with gambling the longer a person plays. With investing, having a long-term approach tends to pay off.
The Bottom Line
Gambling is a game of chance and is high risk as you bet on an uncertain outcome that is likely to turn out negatively, with the odds against you. Speculation is also risky, but it is less reliant on pure chance. With speculation, an investor puts money into an asset that is volatile but has the potential to see a big upswing. Speculation is typically associated with the stock markets and gambling with casinos and online sports betting.