What exactly is an Investor, a Speculator or a Gambler in the
context of the Stock Exchange Market or for that matter, any markets?
The Public as well as the Media have often loosely and interchangeably
used these three terms. Comparisons are often made between their activities,
but the terms are never explicitly defined.
You might ask if there is a need to be distinct on these terms.
Well, there is definitely such a need simply because, if you want to profit
from the market consistently, it is crucial to first, know who you are and how
you are going to participate in the market. In fact, the mindset and methods
employed by an investor, speculator or gambler differs extensively and greatly
affect the profitability of participating in the market. How perilous it is
to venture into the markets blindly!
The Public often called themselves Investors, perhaps, influenced
by the Media. But how many of them are really Investors or even Speculators.
Think about it, many of the self- acclaim Investors are actually habitual Gamblers,
betting on the market on the slightest rumours, insider news, company news or
fluctuations, hoping to get rich quick by chance. This is not a debate on whether
gambling is good or bad, but if you’re going to gamble; don’t you think you
have a better chance at the Casino, which is there for this purpose?
So, what are the differences between an Investor, Speculator and
Gambler? In order to differentiate between them, we should start by defining
them. If you’re sufficiently motivated, I encourage you to try to define the
terms ‘speculating’, ‘gambling’ and ‘investing’ before you continue reading
this article… you may surprise yourself.
Consider the following.
An investor is an individual whose primary concerns in the purchase
of a security are regular dividend income, safety of the original investment,
and if possible, capital appreciation.
A person whose principal concern in the purchase of a security
is the minimizing of risk, compared to the speculator who is prepared to accept
calculated risk in the hope of making better-than-average profits, or the “gambler”
who is prepared to take even greater risks.
In 1934, Graham and David Dodd addressed the issue and offered
a definition of “investment” in their classic text book Security Analysis
“An investment operation is one which, upon thorough analysis
promises safety of principal and an adequate return.
Operations not meeting these requirements are speculative.”
– Graham and Dodd’s Security Analysis (original 1934 edition)
Speculation is the buying, holding, and selling of stocks, commodities, futures,
currencies, collectibles, real estate, or any valuable thing to profit from
fluctuations in its price as opposed to buying it for use or for income – dividends,
A speculator is one who is prepared to accept calculated risks in the marketplace
for attractive potential returns.
Speculation: The activity of forecasting the psychology of the market.
Speculative motive: The object of securing profit from knowing better
than the market what the future will bring forth.
John Maynard Keynes in The General Theory of Employment, Interest, and Money
Gambling (or betting) is any behaviour involving the risk of money or valuables
on the outcome of a game, contest, or other event in which the outcome of that
activity is partially or totally dependent upon chance or on one’s ability to
“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-return trade-off. To turn a gamble into
a speculative prospect requires an adequate risk premium for compensation to
risk-averse investors for the risks that they bear.”
– Investments by Zvi Bodie, Alex Kane, and Alan J. Marcus
Regardless of how you define the terms, it is likely to be a worthwhile activity
to estimate your expected returns on both an absolute basis as well as relative
to an appropriate benchmark. And if you find yourself enjoying the activity
of investing or if you find yourself addicted to the speed and excitement of
the trading game, perhaps you should seriously consider whether you’ve crossed
the line between investing and speculation, or worse yet, maybe you are really
gambling with your money.